Sale Lease-back Financing: What is It? How Can it Help your Business?

This arrangement allows the business owner to raise capital while retaining the use of the assets that are needed in the business. A sale-leaseback can offer the creation of significant source of funds that can be used for a variety of purposes. This includes paying off a specific lender, as working capital, to buy-back capital stock, buying out a partner, or upgrading assets, etc.

In sale-leaseback financing, is accomplished by conveying the title of the asset, at an agreed upon value, to a financial institution in exchange for a lump-sum payment. The business owner then makes lease payments to the finance company in exchange for the cash insertion.

Benefits. Many companies can benefit from this type of transaction. If you don’t qualify for traditional bank financing or want to preserve your existing bank credit line, sale lease-backs can be used to finance growth, restructure troubled financials, provide tax benefits and enhance balance sheets.

This is an approach to raise cash. All business owners know that cash is king. From a tax perspective, sale lease-back offers the possibility to structure the transaction as a taxable sale, which can be offset by net operating losses that, may otherwise expire if unused. It may also offer unique economic or tax benefits for companies that have been unable to utilize net operating loss carry forwards for federal income tax purposes.

Since lease payments are not considered preference items, companies that are in an Alternative Minimum Tax (AMT) situation may benefit as well. This article should not be considered tax advice. Business owners should always seek professional tax advice from their CPA or Tax Attorney before making tax decisions based on a sale lease-back transaction.

Business Qualifiers: If you have been in business for at least 18 months, have a personal FICO Score of 620+, own the equipment outright, no open tax liens, no open bankruptcies and have financial statements that indicate that you can service the lease payments, you are a viable candidate for sale-leaseback financing.

Each finance company has its own minimum transaction size and funding parameters, so it is best to compare terms from each. Note: Restaurant owners typically will have to be in business 2 years, with a personal FICO score of 650+ before the financial institution will consider a sale lease-back transaction.

Eligible Equipment: Most durable equipment is eligible for sale-leaseback financing. Some examples: All types of IT equipment, computers, laptops, servers, network switches, routers, telephone systems, copiers, faxes, machinery, dry-cleaning equipment, telecommunications equipment, cubicle stations, auto repair equipment, diagnostic equipment, construction equipment, health club equipment, and all manner of medical equipment… just to give you an idea.

Gaming and beauty salon equipment typically are not eligible for sale-leaseback transactions. Some finance companies specialize in certain types of equipment. Others will consider a wide variety of equipment.

Application Process: It is surprising simple compared to other forms of financing. Contact the financing company for their 1 to 2 page application. Provide a list of the equipment that you wish considered. (Depending on the age of the equipment, there may not be a requirement for an appraisal of the residual value). Fax the application to the finance company. Expect a response in 24-48 hours. If you approve their proposal, you can have funds in-hand in 10-14 days.

It should be noted that you are selling a company asset to a finance company and then leasing it back. As such, the application/approval process is more straightforward than the typical debt-financing transaction and therefore a much faster funding process.

In summary: If you are in need of a cash infusion for your company, own equipment outright and are willing to sell equipment to a specialty finance company, but retain it for use in your business, then sale lease-back financing is a financing tool that is available to the business owner.