Equipment Sale Leaseback is a transaction that transfers temporary ownership of equipment assets to a leasing company in exchange for an upfront lump sum payment. The company then makes lease payments and retains physical possession of the equipment.

Despite common misconceptions, sale leasebacks are not expensive and offer potential tax advantages. Read on for the top five benefits of this financial structure.

1. Unlocking Liquidity

If you have expensive equipment that is sitting idle, an equipment sale leaseback can unlock trapped cash for growth without taking on debt or giving up ownership.

Basically, you sell your equipment for its residual value to an independent financing company, who becomes the owner and you make lease payments. This transfers temporary ownership of the equipment to a new financing entity, but there is no change in physical possession.

You get the capital you need to fund operations, seize opportunities or pay down other debt – improving your balance sheet and credit profile for future funding. Plus, you retain access to your critical revenue-generating assets.

If you work with a reputable independent financing partner, they can tailor a solution to meet your business goals. This includes negotiating lease rate factors that align with your forecast and minimizing total capital costs by integrating accounting and tax incentives into the structure. They can also right-size lease durations to match your projected investment horizons for the equipment and provide flexibility with renewal options.

2. Tax Benefits

Often times, equipment sale leaseback is an effective financing solution because it can provide companies with tax advantages. With a proper structure, lease payments can be classified as operating expenses and thus be deducted from taxable income.

This can make the transaction more cash flow friendly, especially for companies with predictable revenue streams. Additionally, lease payments are typically lower than traditional debt financing.

It’s important to work with a leasing advisor that understands your business, and can create a sale leaseback solution tailored to your short and long term capital needs. A well-structured sales leaseback can also have favorable impacts on financial reporting and a company’s ability to access additional debt in the future.

There’s a common myth that only certain types of equipment qualify for sale leasebacks, but this is simply not the case. Today’s finance marketplace accepts a broad range of equipment assets and can customize lease terms around operating forecasts. This enables you to leverage your existing assets for growth without taking on new debt.

3. Retention of Asset Use

Unlike equipment financing, sale leasebacks allow you to keep your existing equipment in use during the lease term. This is especially important for life sciences companies with specialized lab assets and limited space.

To structure a sale leaseback, identify specialized equipment, machinery, vehicles or other capital assets that are free and clear of liens and have a fair market value. Get these assets professionally appraised and then approach a financing company to sell the equipment to them for a lease term that works with your cash flow requirements.

Depending on the structure, you may be able to receive cash proceeds up to 60-80% of your fair market value. This allows you to monetize your existing equipment while preserving your working capital for growth initiatives and meeting your short-term liquidity needs. Be sure to work with a financing partner with expertise in sale leaseback structuring to ensure it works for your business. Also consider how the lease will impact financial reporting.

4. Flexibility

In contrast to the limiting myths often heard about sale leaseback, working with a financing partner that specializes in these transactions can help to structure a solution that aligns with your business goals. This can include negotiating flexible usage parameters, end of term purchase options or even terms that allow for flexibility as your business’s forecast needs change over time.

For life sciences companies that often use expensive lab equipment, leveraging sale leaseback allows you to unlock your capital locked up in your assets while retaining access and usage. This can help to ensure operational continuity and allow you to monetize your existing assets without sacrificing future growth potential.

Unlocking the hidden capital trapped in your equipment and deploying it to core priorities like expansion or inventory buffers can give your company pivotal financial flexibility. By breaking down #ABLmyths, we hope this guide sparks innovative ideas and shatters limiting misconceptions around this unique asset monetization strategy.