Most small business owners prefer to lease their capital equipment to increase cash flow, but how can you lease when you already own? A sale-leaseback agreement frees up cash in the same way.
With a sale-leaseback, you sell equipment your company owns to a commercial financing company. That firm then leases the same equipment back to your company. The equipment needn’t move an inch during the process.
Does a sale-leaseback work for your small business? It can if you receive favorable terms and you need the cash. Your firm may need cash flow to expand, build new product or hire additional employees. A sale-leaseback agreement also lowers your debt service, assuming outstanding loans on the equipment.
Not all companies will qualify for this financing technique. Financing companies base a sale-leaseback agreement on the equipment’s liquidation value. If the equipment isn’t new or functional enough to last for two to seven years, the typical term, you won’t qualify. You also lose some advantages of ownership, which includes the business expense write-off of leasing.