Equipment Sale Leaseback Financing
With some of the major investment banks themselves experiencing financial difficulties, it is obvious that the credit crunch will continue for some time. However, there are still a tremendous number of businesses that are looking to fund the expansion of their operations. One option of funding is to use the equity in the business’s equipment. This financial tool is called Equipment Sale Leaseback.
Equipment Sale Leaseback is the sale of currently owned equipment for cash. The asset remains with the seller who contracts to lease it back. By using equipment equity a business can quickly obtain cash they need for working capital and expanding their business.
Sale Leaseback financing varies from traditional leasing in that instead of
purchasing equipment from a vendor and leasing it to the business. The leasing company buys the equipment from the business and then leases it back to the same business.
Leasing companies do perform their due diligence on used equipment the business expects to use in the transaction. The leasing company will verify that the equipment was actually purchased and is still owned by the business. By performing “lien searches” the leasing company will be looking for other lenders who may have already filed a lien against the equipment. Blanket Liens are a type of lien the Leasing Company will be looking for. Many lenders, when they provide business funding will include a Blanket Lien against "all assets now or acquired in the future." This affects all of the businesses assets, even when the business pays cash for a piece of equipment. Equipment expected to be used for a Sale Leaseback transaction cannot be encumbered by any type of lien.
Equipment Sale Leaseback Financing
1. Non functioning equity can quickly be turned into useable cash.
2. Write off the monthly leasing payments.
3. No restrictions on how the money is used.
4. The equipment does not need to be removed, or taken off-line.
5. Leasing may provide lower monthly payments than a loan.
1. A business owner completes the Leasing Company’s application and provides the required documentation.
2. Lien searches will be completed by the lender to confirm that the equipment is not being used as collateral by another lender.
3. The equipment is identified by its serial #.
4. Fair Market Value (FMV) of the equipment is established.
5. The business sells the equipment to the finance company and then leases it back.
Typical parameters (will change depending on the lender):
1. The equipment will be purchased by the funder at 70% of the FMV.
2. The equipment cannot be encumbered by other liens.
3. Amounts below $50,000 may only require an application.
4. Amounts over $50,000 may require full financial documentation package.
5. Equipment up to 10 years old.
6. Commercial equipment or vehicles.
7. Equipment lease property tax paid monthly.
8. Restrictions may apply to certain types of equipment.
Equipment Sale Leaseback financing is a tool that can quickly provide working capital to a business searching for financing. It is an alternative that both business owners and brokers should consider during the current credit crunch.
1. All financial tools should lead to higher profits. If the financing doesn’t assist in making the company more money, is it really a wise decision?
2. When a company provides clear and concise information - up front, they will receive quicker and more informed responses from their funding sources.
3. Companies that have skeletons in their closets need to open the doors. Those doors will eventually be opened anyway, so why waste everybody’s time. Skeletons can be dealt with when they are honestly presented.