While the appeal of owning your equipment is often strong, leasing can free up significant capital for small business owners. Leasing capital equipment frees up cash for other financial needs of growing companies. Maybe you’re looking to expand, but can’t afford to buy new equipment.
Advantages of Lease
Low initial investment
Effective use of the company’s capital
No asset obsolescence burden
Leasing Also Has Disadvantages
You don’t own the equipment
Potential higher overall cost, depending on the length of lease’s term
The inability to consider leased equipment an asset, a disadvantage if you need collateral to qualify for a loan
No depreciation deduction on your tax return, unlike the tax benefits of ownership
Almost Any Type of Equipment Can Be Leased
Manufacturing and Production Equipment
Construction Equipment (cranes, tractors, forklifts, machine tools)
Energy Equipment, HVAC, and Lighting
Transportation Equipment (trailers, delivery vehicles)
Medical Equipment and Computer Systems
What is a Sale/Leaseback?
The term ‘sale leaseback’ is a shortened term for ‘sale and leaseback’. In a sale leaseback transaction, the owner of an asset sells it to someone else, usually a finance company, then immediately leases the asset back from the buyer.
Is a Sale – Leaseback Right for You?
The biggest advantage of a sale leaseback is that it allows the owner of an asset to free up cash/capital. As with a regular lease, a sale leaseback gives you the ability to purchase equipment your business needs without using up your cash or line of credit.
The equipment needn’t move an inch during the process.
A sale leaseback can improve your balance sheet. By selling the asset, you put cash back into your company and instead have smaller recurring monthly payments over the course of the lease. This can benefit your cash flow and keep your other lines of credit open for inventory and other uses. You get basically all the same advantages as having put the equipment on a lease in the first place.
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 2 to 7 years, the typical term, you won’t qualify. You do lose some advantages of ownership, which includes the business expense write-off leasing.
Disadvantage of Sale Leaseback
The only real disadvantage of a sale leaseback is that you are not the owner of the asset until you buy it out at the end of the lease. So, it’s temporary disadvantage and a minor one because you still have the benefit of using the asset.