Used equipment sale and leaseback can be a key source of capital for a business in any type of industry where there is considerable equity tied up in equipment that the operations owns outright.
In order for any particular piece of equipment to be eligible for equipment financing of this sort, there needs to be significant useful life left in the asset and the asset needs to already have a well established resale market.
When we say significant useful life remaining, the remaining useful life needs to exceed any proposed lease term by a fair margin.
So if someone was getting a used equipment sale and leaseback transaction completed for a three year terms, the lease financing company would likely want to feel comfortable that the asset had at least 5 years of useful life left.
So the things that play into remaining useful life are 1) the actual age of the asset; 2) the condition of the asset; 3) and the amount of use in the form of running hours, miles, etc.
The better the combination of all three, the more likely you are to get a used sale and leaseback transaction completed and with pretty good rates and terms.
From an amount of financing perspective, lenders and leasing companies tend to be more aggressive financing the purchase price of used equipment than a sale and leaseback scenario.
This is largely due to the fact that a purchase is an actual transaction where money changes hands between parties, making the underlying value of an asset or assets more clear.
With a used equipment sale and lease back transaction, the value of the assets to be financed are being estimated which provides less confidence in the value compared to a purchase, even when the valuation is being done by a professional appraiser.
So while the loan to value amount you could potentially secure with a purchase of used equipment could be as high as 85% of the cost of acquisition, a sale and lease back transaction may only provide 60% to 70% of the forced liquidation value of the asset.
From a time to repay point of view, most sale and lease back transactions are in the one to four year time range with most coming in at around three years.
The transaction is called a sale and leaseback because the owner of the equipment is actually selling the equipment to the financing company for a cash amount and then paying that same amount back over a lease term, typically on a monthly payment basis.
Then, at the lend of the lease term, the borrower or lessee would typically repurchase the equipment back from the equipment leasing company for some nominal amount such as ten dollars.
By selling the equipment to the leasing company, the business owner still retains exclusive use to the assets plus receives cash for other purposes, and the leasing company receives ownership which is a stronger security position from which to advance money.
Used equipment sale and lease back transactions will be easier to accomplish, with better rates and terms, if the use of funds is for a business development, business maintenance, or business growth application.
If the use of funds is to provide more working capital into a distressed situation that is not financially stable, then there will be fewer equipment financing companies interested in the deal and the rates and terms will be much less favorable due to the potential risk of loss by the lender.
For more information on used equipment sale and leaseback transactions, please give us a call and we’ll make sure you get all your questions answered right away.
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