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Sale-leaseback: turning equipment you already own into working capital

By  ·  Published  ·  7 min read

The short answer

A sale-leaseback sells equipment you own outright to a lender and leases it straight back to you. You keep using it, the equity comes out as cash, and you buy it back at the end. It is one of very few routes to working capital for a business whose value sits in machinery rather than in receivables or a credit score.

Part of our guide to Collateral Loans — what it is, what it costs, and who it suits.

Not sure this is the right product at all? The Idaho small business funding guide covers every option an Idaho business has.

There is a particular kind of Idaho business that looks poor on paper and is not. A hay operation outside Rupert with a yard full of paid-off equipment and a tight cash position in April. A logging contractor near Orofino between contracts. A dirt contractor in Caldwell who put three years of profit into iron and now needs payroll through a slow quarter.

A bank reads the bank statements and sees a cash problem. The yard is full of the answer.

How it works

  1. A lender values equipment you own free and clear.
  2. They buy it from you. The money arrives as cash.
  3. They lease it back to you immediately — it never leaves your yard and you keep working it.
  4. At the end of the term you buy it back, usually at a price fixed at the start.

Nothing about your operation changes day to day. What changes is that capital locked in the asset is now in the account, and you have a monthly payment where you previously had none.

When it is genuinely the right tool

  • The business has real equity in equipment and little in cash.
  • The need is specific and finite — a payroll gap, a materials order, a mobilisation cost on a contract already won.
  • The equipment is not for sale, because selling it ends the business.
  • Conventional working capital is closed off, usually because the score or the trading history will not clear.

When it is the wrong idea, stated plainly

If the business is losing money structurally, this converts an asset into a few more months and then you have neither. That is the single most common way a sale-leaseback hurts somebody, and it is worth sitting with honestly before signing.

It is also the wrong tool if what you actually need is a revolving facility. A line of credit you draw and repay as the season moves is cheaper and more flexible than a lump sum against your iron, if you can qualify for one. Try that first.

Read the buy-back terms before anything else. The price should be fixed at the start, and you want to know exactly what happens if you want to exercise it early — some structures charge for that and the amount varies deal by deal.

The part people miss

A sale-leaseback is not a loan, legally, and the paperwork is two agreements rather than one: a lease and a buy-back option. That has consequences for how it appears in your books and how it is treated for tax, and those consequences are not the same as a financed purchase.

Ask your accountant before you sign, not afterwards. This is one of the places where the structure genuinely changes the answer, and it is cheap to ask and expensive to assume.

Common questions

Do I lose control of the equipment?
No. It stays with you and you keep operating it throughout — that is the entire point of the structure.
What if I want to buy it back early?
Usually possible, sometimes with a charge that varies by deal. Get the number in writing at the start rather than assuming it is free.
Does my credit matter?
Far less than for conventional working capital. Programmes exist in this space with no published score minimum, because the equipment carries the deal.
Can I do this with financed equipment?
Not usually with equipment that still carries a lien. It generally has to be owned free and clear, though a payoff can sometimes be built into the transaction.
Klark Sparks Headshot

About the author

Klark Sparks, co-founder and commercial finance broker at Sparks Family Finance.

Klark works with owners at the two points that decide everything: when they are working out whether to start, and when the business is running and needs capital to keep going. He would rather give someone the honest answer — including that borrowing is the wrong move this quarter — than place a deal that looks good this month and hurts next year.

More about Klark and Sparks Family Finance

Products covered here

Collateral LoansEquipment FinancingLines of Credit

Where this comes up most

JeromeRupertCaldwellOrofino

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