The funds secured through sale and lease back financing can be used to:
In order to be able to arrange this type of equipment financing, you are going to need to own equipment that is fully paid for or has very little debt still owing against it.
The type of equipment can vary, but the common characteristics are durable commodity based assets with a long useful life and strong resale market for used equipment.
Most equipment financing facilities are for less than seven years, so if you have an asset that has a useful life of twenty years or more, then there is a good bet that the equipment can be refinanced a second time to free up the equity paid into it over the term of the initial financing facility or cash purchase.
An equipment sale and leaseback transaction takes place when you sell an existing piece of equipment that you own to an equipment leasing company in exchange for cash and a lease agreement that continues to provide you with exclusive access and use of the asset during the lease term.
The financing amount will vary from company to company, but similar to any financing arrangement, there will need to be an equity component in the transaction to provide further security to the lender as this is financing of used equity.
For instance, a leasing company may offer to acquire the asset for 60% of the liquidation value of the asset.
Because you are getting cash proceeds considerably less than the value of the asset, you would typically enter into a capital lease whereby at the end of the lease term, when all the payment have been made, you would be able to reacquire the piece of equipment for predetermined nominal purchase price of less than $100 in most cases.
For a lender or leasing company, the ability to acquire ownership of the equipment being financed provides a greater incentive for them to commit to this type of arrangement which in turn allows you to achieve greater financial leverage on the assets you have equity in.
As mentioned earlier, the one of the keys to securing this type of equipment financing is to have equity in an asset with both substantial useful life remaining and an active and fairly predictable resale market.
The assets also need to be well maintained and in good condition.
Besides the focus on the type of asset, the market valuation, and the remaining useful life, sale and lease back transactions also are impacted by the use of funds and the financial stability of the business operation.
For instance, businesses that are in a distress situation will have a harder time securing a sale and leaseback financing arrangement and if one can be secured the rates can get into the high teens or higher.
For lower cost equipment sale and lease back financing transactions, the business needs to be financially stable with the use of funds more geared to growth or debt consolidation.
If you are trying to arrange an equipment sale and leaseback financing transaction, or would like to know more about them, I suggest that you give us a call and we’ll get all your questions answered right away.