The Equipment Sale Leaseback is a financing structure where a company sells its assets to an equipment finance company, which then immediately leases them back. This monetizes existing equipment and improves working capital without disruption.
A well-structured sale leaseback preserves debt capacity and provides flexible lease terms that align with operational needs over longer investment horizons. Here’s how it works:
1. Tax Advantages
Sale leasebacks provide an opportunity for a company to monetize its assets and improve liquidity. In the life sciences space, where costly analytical instrumentation is status quo, this can be especially helpful to raise capital to fund growth initiatives or cover temporary cash shortfalls. Lease terms, including monthly leasing rates and renewal options, can be customized to align with operational needs and business goals.
However, it’s important for businesses to thoroughly evaluate their financial landscape and ensure that sale leasebacks align with their operational forecasts and long-term growth strategies. Additionally, it’s critical to understand the tax implications of this type of financing and consult a tax professional. These factors can have a significant impact on the desirability of an equipment sale leaseback and its final cost.
2. Increased Cash Flow
One of the primary advantages of equipment sale leaseback is enhanced cash flow. By converting non-liquid assets into cash, businesses can reinvest in growth opportunities, pay down debt or manage day-to-day expenses.
As with any financing strategy, it’s important to fully evaluate the terms of an equipment sale leaseback to ensure they align with your operational and long-term business objectives. Choosing a financing partner that provides tailored solutions is key.
Atlas Medical was able to unlock over $500,000 in trapped value from assembly machines and test equipment purchased years earlier through an equipment sale leaseback. By redeploying freed-up capital into accounts receivable management and inventory control, Atlas maintained production without disruption. At the end of the lease term, Atlas can either buy back the equipment or renew the lease to continue making payments.
3. Tax Deductions
Sale leaseback works like an equity loan on your house, but for equipment. A company sells its equipment to a financing company, which then leases it back to the business for a fixed payment over a term. This finance technique is often more tax friendly than most ways a small business can access capital, as payments are classified as operating costs.
When structured strategically, sale leasebacks can unlock trapped liquidity for growth without debt or loss of control. They can also provide tax deductions, minimize total capital costs and align financing with long-term investment objectives. To maximize the value of these arrangements, businesses should partner with experienced leasing providers and consult with financial experts to fully leverage available deductions and optimize the terms of their agreements.
4. Flexibility
When done right, an optimized sale leaseback structure provides non-dilutive capital to fund growth while maintaining operational efficiency. In a sale leaseback transaction, you temporarily sell your equipment assets to a financing company for their fair market value while retaining usage of the assets.
Your financing partner will then lease the equipment back to you for a specified lease term. This enables you to unlock equity in your lab equipment without selling it for the full value or incurring any debt.
The sale leaseback process can be quick and simple. Your lab will be able to access the cash infusion it needs immediately while maintaining ongoing use of its valuable equipment. Lease payments can be structured to align with your budget and operating schedules for a flexible solution that suits your business.
5. Reduced Risk
Many myths surround equipment monetization and sale leaseback financing. It’s commonly believed that only a narrow group of equipment assets qualify for this type of financing arrangement due to valuations, condition, title and other factors. But well-structured sale leasebacks can repurpose a broad range of equipment assets while allowing for operational continuity.
The process involves selling equipment or machinery to a financing company, and then immediately leasing it back for an agreed period of time. This allows you to turn illiquid assets into liquid capital for both short- and long-term goals, such as paying off debt or investing in growth initiatives. Your financing partner will work with you to structure a payment schedule that aligns with your operational goals and asset lifecycles. This includes negotiating “bend points” to account for fluctuations in usage.