Sale LeaseBack Equipment Leasing
Sale LeaseBack Transactions
Overview
A Sale-Leaseback (“SLB”) transaction is where a customer sells equipment that they already own to a leasing company, and then leases back that equipment. This provides cash to the company for working capital needs. There are special considerations and challenges present in attempting to close SLBs.
SLBs are one of the least understood and most complicated types of lease transactions. In addition, they are often very hard to get approved, can be complicated to document and close, and sometimes go “off the rails” at the last moment. Therefore lenders often have the customer sign a term sheet, and pay a non-refundable work fee or application fee before spending too much time on one of these transactions.
Many lease funders in North America have a policy of “No SLBS” – they only fund new or used equipment coming from approved vendors. We have a few funding partners who will consider SLB transactions – usually at higher rates.
Considerations:
Very often an SLB transaction makes “sense” for the customer, but makes “no sense” for our funders to approve it. Often customers come to us trying to do an SLB because they are in financial trouble – and of course, funders don’t approve companies that are in trouble.
Generally the applicant’s credit and financial strength (as evidenced by the financial statements) would need to be strong enough that we would be able to get them approved if they came to us looking to lease new equipment for the same dollar amount. Look at it this way: if the customer came to us looking to lease $200k of new equipment and we couldn’t get them approved, then what are the chances of getting them approved for $200k where the assets are a “package” of old used equipment, machinery, etc whose value we may or may not be able to substantiate?
The assets for the SLB must be owned “free and clear” of any liens or encumbrances. Quite often the customer will tell us that they own the assets and that there are no loans against those assets. However, if their bank has a General Security Agreement (“GSA”) registered against the company, then these assets do in fact have a lien against them. That is what a GSA does… it gives the bank a “first position lien” against all assets of the company. The only way that we can be sure that the assets proposed to be used in the SLB are in fact “free and clear” is to perform a lien search. Lien searches cost money, and this is another good reason to get a term sheet and work fee or application fee very early in the process. Often the lender will require a non-refundable payment from the applicant at the time of the application to cover the cost of lien searches.
Characteristics of an “Approvable” SLB Transaction:
- Well established company
- Favourable industry with good near to mid-term stability and growth prospects
- Good Commercial (and possibly Personal) Credit Bureau
- Company is not “in trouble”
- Assets proposed for the SLB are assets that retain their value and aren’t too old (ie based on the typical economic lifespan for that asset – for example metalworking equipment may have a 10 year useful life-span, while computer equipment may have 3 years.)
- Amount to be financed typically not to exceed 50-60% of appraised Auction Value, also known as the Forced Liquidation Value – although some funders will be flexible on this, especially if the equipment was only recently purchased and is supported by copies of the original invoices – in which case the funder would probably not even require an appraisal.
- Reason for the SLB needs to make sense. Ex) raising working capital for expansion, or to purchase additional inventory, open an office in another area, launch a new product line etc.
Characteristics of an “Un-approvable” SLB Transaction:
- Company not very well established
- Un-favourable industry (ex. restaurant and entertainment, other industries that are experiencing stress)
- Poor Credit Bureau
- Company is in trouble
- Assets are poor – (ie. Limited resale value because of type of assets or age of the assets, or because they are custom made for that company etc.)
- Reason for the SLB doesn’t make sense from the funder’s point of view.
Distressed Debt Loans:
Home n Work Leasing does have sources of distressed debt financing that may be more appropriate than an SLB. This type of financing has the following characteristics:
- Term loan secured by eligible equipment and machinery
- Loan amount not to exceed 60-80% (depending on the lender) of the appraised Auction Value, also known as the Forced Liquidation Value.
- Minimum $500k (some lenders require minimum $1million)
- Minimum term of 6 months
- Maximum term of 18 months at which time the customer will need to refinance with a traditional lender
- Setup Fees of between 2.5 to 5 points
- Monthly interest is typically 2% or more
This type of distressed debt financing is typically used as a last resort by companies who are facing liquidation if they cannot come up with short term money. Very often the impending liquidation is because their bank has given them notice of its intent to “call in” the company’s loans.
Required Information for Sale-Leaseback Transactions:
The following is a list of required application information which may be necessary to obtain a credit decision on a
Sale-Leaseback transaction
- All of the “usual” information that would normally be required for a transaction of a similar dollar amount, plus the following:
- Detailed list of the equipment that is being offered for the Sale-Leaseback.
- Copies of original invoices for this equipment (if available)
- Depending on the size of the transaction and/or the age of the equipment a formal appraisal may be required. There are several accredited appraisal companies that could be used. Certain funders have lists of “approved” appraisers and the appraisal MUST be completed by one of the companies on that list – and we can put the applicant in touch with an approved appraiser.
- If the equipment was only recently purchased, and the customer can provide copies of the original invoices, we will probably not need any appraisal.
- Writeup describing the reasons for the proposed Sale-Leaseback. Remember, this must make sense from our or our funder’s point of view.
