Transforming Equipment into Cash Through Sale/Leaseback

By Andrew Landers

 

Each year American businesses, nonprofits and government entities invest more than $1.2 trillion in capital equipment—equipment that has a medium- to
long-term useful economic life. Of that equipment, roughly 51 percent, or $628 billion, is financed through loans, leases and other financial instruments.Footnote  (Opens Overlay) Why is so much equipment financed in the U.S.? Because U.S. capital providers have a high degree of comfort and confidence in equipment financing, which has proved to be both a stable and resilient marketplace over the years. The value of their equipment provides an organization access to capital that can help improve cash flow and support other areas of their businesses.

A sale/leaseback is straightforward financing in which a company that owns equipment—such as mining equipment, delivery trucks, railroad cars or manufacturing machinery—sells that equipment to a financial institution and then leases it back from the financial institution for a specified period of time. Often these financings only require a single appraisal by an independent third party to determine the fair market value of the asset to be financed and a minimal amount of paperwork. Sale/leasebacks have been used for the last 50 years by capital-intensive industries and organizations seeking to enhance their liquidity.

Benefits of Equipment Sale/Leaseback

Corporations, nonprofits and government entities can realize several benefits from entering into sale/leaseback financing for equipment they currently own.

  • Improve cash flow: One of the primary benefits of sale/leaseback arrangements is the ability to raise capital for operating expenses or for expansion in another part of the business or organization.
  • Lower financing cost: Because a sale/leaseback arrangement is a taxable event, any gains the selling organization (the lessee) makes on the sale of the equipment can be offset by any net operating losses it may be carrying on its books. In addition, the financing organization (lessor), as the new owner, can "restart" depreciation on that equipment and pass it along to the lessee in the form of lower lease payments. Either of these benefits can serve to lower the lessee's cost of borrowing by transferring the equipment to an entity that can utilize the tax deductions more economically.
  • Get flexibility: The sale/leaseback form of financing is very flexible. It can be structured in many different ways to meet the unique needs of the selling organization, while at the same time giving the lessee different options and control.
  • Transfer risk: When an organization sells an asset to a financial institution, it is essentially mitigating its risk of equipment obsolescence since the lessor is now the owner of the equipment.
  • Improve financial reporting: Sale/leasebacks may result in operating lease treatment for the lessee, which can have a favorable impact. However, proposed accounting rule changes to leases will likely reduce this benefit.
 
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Meet the Author

 
Photo: Andrew Landers, Senior Vice President, Chase Equipment Finance

Andrew Landers
Senior Vice President
Chase Equipment Finance

Andrew is responsible for managing equipment financing products and strategic projects involving regulatory, industry and technology changes. With more than 15 years of experience, Andrew has served in a range of roles, including originations, structuring and financial analysis.

 
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Types of Equipment

Almost any type of asset that has a medium to long economic life can be financed through a sale/leaseback arrangement, including:

  • Manufacturing equipment
  • Mining machinery and equipment
  • Marine vessels
  • Construction and off-road equipment
  • Medical technology and equipment
  • Municipal and corporate aircraft
  • Rail cars and rolling stock
  • Trucks and transportation equipment
  • Business, retail and office equipment
 
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At the End of the Lease

When the lease reaches its term, there are several options available to the lessee. If the lessee wishes to continue using the asset, it can work with the lessor to negotiate a renewal for the agreement. If the lessee has decided the asset is no longer required or needs to be replaced, the lessee can return the asset to the lessor. If all of the return conditions have been fulfilled, the lessee will have no further obligations.

Another option, which is typically negotiated up front, is an early buyout option. This allows the lessee to repurchase the asset before the lease is up at a fixed price.

How Chase Can Help

Many financial institutions can provide equipment financing, including sale/leasebacks. At Chase, we have a team of dedicated people who will work with you to negotiate agreements that are mutually beneficial and will be available to you throughout the term of the lease. Integrity is important to us. Chase delivers what it says it will deliver. We stand behind our agreements.

In addition, Chase's equipment financing professionals have the expertise to identify any transactional concerns and design solutions before those concerns become problems. We make the closing process quick and easy for the lessee. We've been active in the equipment financing arena for many years, have developed a deep understanding of the business and have the ability to structure unique and customized solutions to meet your needs.

 
 

To learn more about how Chase's solutions can help you,
please contact us or call your Commercial Banker.