A Sale Leaseback and Asset Based Lending
If you’re a business owner with heavy equipment on your hands and need cash, asset based lending and sale leaseback options might be what you need. These financing options use the equipment you own as collateral. Giving you access to cash at better terms than you might get from other business loan sources.
How A Sale Leaseback and Asset Based Lending Works
A Sale leaseback and asset based lending products work by using your assets to support a loan. You receive money right away and you pay it back in monthly payments as you would with a regular loan. The condition is that if you default on the loan, the lender takes possession of the equipment you’ve used as collateral.
Lenders are willing to enter into asset based lending typically when the assets you’re offering are valuable and easy to deal with. Lenders look for assets that have a high resale value, and have an active resale market. Fortunately for heavy equipment owners, construction equipment and heavy equipment falls into these categories.
Advantages of A Sale Leaseback and Asset Based Lending
Because a sale leaseback and asset based lending are backed by tangible assets that you own, lenders are willing to make these deals with businesses that might not otherwise qualify for standard business loans. If you’ve got bad credit or if your business is new, you might not be able to get a traditional loan. But if you own the right kind of equipment, you’ll qualify for a sale leaseback arrangement, even with those other strikes against you.
These types of loans are less risky for lenders. Most of the time they can offer lower rates, longer terms, and lower monthly payments than they would for traditional loans.
Sale leaseback loans and asset based lending may also qualify for tax benefits. This will make the sale leaseback cheaper for you than with a typical loan.
Disadvantages of A Sale Leaseback and Asset Based Lending
The most obvious disadvantage of a sale leaseback loan is that it is secured by your equipment. If you default on the loan, the lender will repossess the equipment. If you run into financial difficulty, you risk losing some of your business’s most valuable assets.
The loan-to-value ratio of sale leaseback loans and asset based lending is also high, usually 2 to 1. That means that you’ll need equipment that’s worth twice as much as the amount of money that you want to borrow. When you combine that fact with the risk of default, you’ll see that you stand to lose equipment that’s worth much more than the amount of money you’re allowed to borrow.
When a lender is determining how much your equipment is worth, they’ll use an auction valuation. This is the amount they can get by selling it at auction, which is much less than the expected market value of the equipment. That makes the difference between the value of the equipment and the allowed loan amount even greater.
Even with these disadvantages, a sale leaseback or asset based lending can be a great way for heavy equipment owners to leverage their assets to gain access to cash.
Visit us or call us at 801-386-8222 today to discuss how a sale leaseback or asset based lending could work for your company.