Sale-leaseback: raising cash against equipment you already own

You own the machine outright. It is worth something. A sale-leaseback turns that into working capital without stopping production — you sell the asset to a funder, sign a lease on it the same day, and keep using it.

The mechanics

1. You identify equipment you own free of liens, or nearly so.
2. The funder values it, usually by appraisal or by desktop valuation against auction comparables.
3. The funder buys it for an agreed price and wires you the money.
4. You sign a lease and start making payments.
5. At the end, depending on structure, you buy it back for a nominal amount, a fixed amount, or fair market value.

The equipment does not move. Your operations do not change. What changes is that an asset became cash and a monthly obligation.

The valuation, and why the number disappoints

Funders do not lend against what a machine is worth to you in production. They lend against what they could recover if they had to take it and sell it. Three values matter, and they are not close together:

Sale-leaseback pricing runs off the liquidation numbers, and then an advance rate is applied to that.

Illustrative only — a machine with a $110,000 replacement cost is appraised with an orderly liquidation value of $48,000. A funder advancing 70% of orderly liquidation value funds $33,600. If you were expecting a number anchored to what you paid, or to what it would cost to replace, this is where the conversation gets short. The figures are constructed to show the arithmetic, not to describe any funder's policy.

The tax problem nobody mentions in the sales call

If you expensed the equipment when you bought it — section 179, bonus depreciation, or years of regular depreciation — its adjusted basis may be at or near zero. Selling it, even to a funder who leases it straight back, is a sale. Gain up to the amount of depreciation you previously claimed is generally recaptured as ordinary income under Internal Revenue Code section 1245 for equipment.

In plain terms: raising $48,000 against a fully depreciated machine can produce a taxable event in the year you do it. That is not a reason to avoid the transaction. It is a reason to model the tax before you sign, because the point of the exercise was cash, and an unplanned tax bill undoes some of it.

Talk to your CPA first. Bring the draft documents.

Where a sale-leaseback earns its place

Where it goes wrong

Price it as a total, not as a payment

Those are the three figures to extract from any sale-leaseback proposal: cash to you, total of payments including the buyout, and the rate connecting them. A monthly payment on its own compares nothing, because the term is the other half of the price and it is the half the proposal is quietest about.

Check your existing loan documents first

A sale-leaseback is a sale. Most bank loan agreements carry a negative covenant restricting the sale or disposal of assets outside the ordinary course of business, and many restrict sale-leaseback transactions by name. Equipment finance agreements frequently do the same for the specific asset.

So the sequence is: read the covenants in every facility you already have, work out who has to consent, and ask them before signing anything with the new funder. A transaction that cures a cash problem and triggers a default in a cheaper facility has made the position worse, and the consent request is one email.

Questions to ask before you start

• What valuation method are you using, and will I see the appraisal?
• What is the advance rate against that valuation?
• Is this a true lease or a conditional sale, and what is the end-of-term buyout?
• What is the total of all payments plus the buyout, in dollars?
• What lien releases do you need, and from whom?
• Are there prepayment terms if I want to buy the equipment back early?

That last one matters if the cash need is short-term. A facility you cannot exit for three years is not a bridge.