Equipment sale-leaseback: turning equipment you own into working capital

In a sale-leaseback, a lender buys equipment you already own and leases it back to you. You keep using the equipment; the lender pays you its agreed value in cash, and you make lease payments over a set term. It turns equipment equity into working capital.

Why businesses use it

• To raise working capital for growth, a new contract or an acquisition.
• To refinance equipment bought with cash that the business now needs back.
• To consolidate several small debts into one payment.
• To fund a large tax payment or an ownership change without a bank loan.

How it works

• The lender values the equipment, often with an appraisal or market data.
• You agree on the amount, the lease term and the end-of-term option.
• The lender pays you, pays off any existing liens, and takes ownership or a security interest.
• You keep using the equipment and make monthly payments.

What lenders look at

The equipment’s value matters most: lenders usually pay less than retail value to leave a margin. Serialized, well-maintained equipment with a strong resale market, such as construction and transportation equipment, is easiest. The business’s cash flow must also support the new payment, so lenders review bank statements and financials as they would for any request.

Things to weigh

• Tax effects of the sale, including possible gain or depreciation recapture. Talk to your tax advisor first.
• The end-of-term option: $1 buyout, fair-market-value purchase or return.
• The total cost compared with a working capital loan or a line of credit.
• Whether any existing loans or leases restrict selling the equipment.

An example

A paving company owns three rollers and a paver free and clear, worth about $450,000 together. It wins a municipal contract that needs $250,000 in materials and labor before the first progress payment. A sale-leaseback on the equipment raises the cash, and the company keeps using every machine. The lease payments are scheduled to start when the contract begins paying.

A sale-leaseback suits equipment-heavy businesses that need cash and own valuable machines free and clear. All financing is subject to credit approval.