Equipment Sale-Leaseback

A Hypothetical Example

A trucking and excavation company owns a fleet appraised at an orderly liquidation value of $1,000,000. It still owes $300,000 on one group of trucks. A lessor agrees to a hypothetical advance of 80% of the appraised value, or $800,000. At closing, $300,000 goes to pay off the existing lender, and the company receives $500,000 before fees. It then leases the full fleet back over a fixed term, with an option to buy it back at the end.

The crews keep running the same trucks and excavators. What changes is the balance sheet: the company now has cash in the bank and a lease payment in place of an older loan.

Lease Structures and End-of-Term Options

• $1 buyout or nominal purchase option. You regain full ownership at the end. Economically this works like a secured loan, and it may be treated as one for accounting and tax purposes.

• Fixed purchase option. The buyback price is set at signing, often as a percentage of the original price, which lowers payments compared with a nominal buyout.

• Fair market value option. The lowest payments, but the buyout price is set at the end, and you may face a large payment to keep equipment you still depend on.

Also check for prepayment penalties, return conditions, insurance requirements and whether the lessor will file liens beyond the leased equipment. Lease accounting standards and IRS rules both look at whether the deal is a true sale and lease or a financing in substance, so ask your accountant how a proposed structure will be reported.

Frequently Asked Questions

Will my operations be interrupted?
No. The equipment stays where it is and your team keeps using it. Apart from an appraisal visit and title paperwork for any vehicles, day-to-day work continues as before.

Can I do this if the equipment is still financed?
Often, yes. The existing loan is paid off from the proceeds at closing. The deal works best when the equipment's value comfortably exceeds what you still owe.

How is this different from borrowing against my equipment?
With a loan, you keep title and pledge the equipment as collateral. Here, the lessor owns the equipment during the lease, which may make it willing to fund older assets or companies a traditional lender would decline. The cost can be higher, so compare both.

How fast can it close?
Desktop appraisals on common equipment can move quickly, while larger fleets and on-site appraisals take longer. Clean maintenance records and a clear lien picture speed things up.

Explore Financing Options for Your Business

If your company owns valuable equipment and needs cash, compare an equipment sale-leaseback with a refinance, an asset-based line and other options. Look at the total cost of the lease, the buyout terms and how the payments fit your cash flow, then choose the structure that keeps your equipment working and your business funded.

An equipment sale-leaseback lets a business sell machinery, vehicles or other equipment it already owns to a lessor and lease it right back, so it receives cash today while the equipment never leaves the shop floor or job site. It is a way to raise capital from assets the company has already paid for, or mostly paid for.

Unlike a real estate deal, which centers on a building, a long lease and a property investor, an equipment transaction is priced on appraised liquidation values, runs for a shorter term and usually ends with a buyout option. This page walks through how it works, what equipment qualifies, how values are set and what to watch in the lease.

How the Process Works

1. Equipment list. You provide a list of the assets with models, years, serial numbers and hours or mileage.

2. Appraisal. The lessor orders a desktop review or an on-site appraisal to estimate liquidation value.

3. Lien check. A UCC search confirms who holds liens on the equipment. Any existing loan is paid off from the proceeds.

4. Purchase and lease. The lessor buys the equipment under a bill of sale and, for titled vehicles, takes title. You sign a lease covering the same assets.

5. Funding. You receive the purchase price minus any payoffs and fees, and begin making lease payments.

Equipment That Qualifies

The best candidates are general-purpose assets with active resale markets and plenty of useful life left:

• Construction and earthmoving equipment such as excavators, loaders and cranes.

• Trucks, trailers and fleet vehicles used in hauling, delivery or service work.

• Production machinery such as CNC machines, presses, molding machines and fabrication equipment.

• Material handling equipment such as forklifts and conveyors.

• Medical, printing and food processing equipment with established secondary markets.

Harder assets include heavily customized machinery, equipment built into a building, software, and small items with little resale value. A lessor may still include them as part of a larger package, but they add little to the amount advanced.

How the Equipment Is Valued

Lessors base the purchase price on what they could recover if they had to repossess and sell the equipment, not on what you originally paid. Appraisals usually report orderly liquidation value, which assumes a reasonable marketing period, and forced liquidation value, which assumes a quick auction sale. The lessor then advances a percentage of one of those values, depending on the asset type, its age and your company's credit.

Newer, well-maintained equipment from widely used product lines supports a higher price. Maintenance records, hour meter readings and photos all help the appraiser.

Reasons to Consider It

• Recover cash spent on recent purchases. If you bought equipment with cash and now need working capital, an equipment sale-leaseback can rebuild your reserves.

• Replace expensive short-term debt. Proceeds can pay off high-cost obligations and replace them with lease payments spread over several years.

• Fund growth or a large contract. Capital drawn from existing equipment can cover mobilization, hiring, materials or additional machines.

• Bridge a slow period or a turnaround. Companies with uneven cash flow but valuable equipment can sometimes qualify when traditional bank credit is not available.