Last Updated on
January 19, 2023
By
Excedr
A sale-leaseback (SLB) is a transaction where the owner of an asset sells their property to another party but retains the ability to use that asset by leasing it back. This means the seller can continue using the asset and recoup the money that was spent purchasing the asset. You may also see sale-leasebacks referred to as sale-leaseback transactions, or simply as leasebacks.
Here's a quick overview of how it works when it comes to leasing equipment:
SLBs are an effective financial tool used across various industries, and are highly useful in the biotech sector, where the high costs of analytical lab equipment can strain budgets. You might be wondering whether you would want to execute a sale-leaseback. Here’s why:
Companies can raise capital from the sale of a recently purchased instrument or system while retaining the ability to use that equipment long-term, helping them effectively manage cash flows. In other words, you can leverage your equipment for cash.
By selling the equipment and leasing it, you’re spreading the cost of the equipment over multiple years, through flexible lease payments. The influx of cash you receive can then be used in ways that help accelerate research and development and reach commercialization or venture capital milestones more quickly.
The ability to drum up funding is most beneficial to companies that are dependent on expensive equipment in dynamic and competitive industries like the life sciences. Another important aspect of SLBs is that, by executing this type of agreement, you can more effectively weather financial challenges without diluting shareholder equity or increasing debt.
As you can imagine, SLBs are also quite useful during economic downturns, when capital markets are constricted and it’s more difficult to secure traditional financing. If it’s hard to raise funding right now, and you’ve purchased a lot of equipment recently, an SLB can be a good option.
Like any financial agreement, an SLB can feel complicated. What’s the hook? Are there aspects of it that I’ll regret later? Hesitations are totally understandable. But rest easy, the agreement itself is straightforward.
After you’ve purchased a piece of equipment and paid for it in full, you can sell the equipment to a leasing company or lender, the buyer/lessor. However, many companies only execute SLBs when the equipment has been purchased within a certain period. In Excedr’s case, our window is generally 9 months since the purchase date.
Before anything happens, you’ll work with the other party on an SLB agreement, making sure you’re clear on the terms of the lease and agree with the lease’s terms. Having agreed upon the terms, you’ll go through with the SLB, selling the equipment to the other party. You’ll immediately earn back what you spent on the instrument and start paying for it via monthly lease payments.
Now, the terms of the lease are generally the same as if you were leasing with the lessor right away and financing your equipment purchase that way.
Depending on the leases the lessor offers, you will enter into a sale-leaseback arrangement that can last between two and five years, depending on your company’s financial creditworthiness, with lease payments factoring in precise service costs in some cases.
Let’s explore the “why” behind SLBs a little further. The main reason a company will execute an SLB is to support expansion efforts and mitigate the risks associated with asset ownership. By converting an asset into capital, labs can:
For businesses interested in funding sources outside of the traditional means, sale-leasebacks provide a debt-equity hybrid option that can enhance their financial position without increasing debt or diluting shareholder equity.
We've simplified the SLB transaction to ensure a smooth and quick turnaround for our clients.
First, we conduct a quick eligibility check. We take a look at your company’s finances, and gather all the details on the equipment, such as equipment type and delivery date, to see if the equipment qualifies. In most cases, we execute an SLB for equipment delivered and installed in the last nine months.
In addition to the eligibility check, we create a preliminary estimate for your lease. If everything goes well—and you’re interested in moving forward with the SLB—we’ll ask for the following documentation:
Upon approval, we execute the SLB, providing you with capital in exchange for leasing your equipment back.
If you reach out nine months after purchasing equipment, it becomes much harder to execute a sale-leaseback transaction. However, if you reach out within nine months of purchase, you may still be eligible for a sale-leaseback.
The time that has passed since purchase affects eligibility, as the equipment may be considered "used" after a certain period of time, complicating the assessment of its condition and value. Ideally, the equipment should be recently purchased to still be considered "new." While there are exceptions to this time window, eligibility depends on several factors and varies by specific use case.
Ideally, the PO does not include service coverage. If it does, it can be more complicated to complete the sale-leaseback transaction.
This is due to issues that can arise with the manufacturer, because the manufacturer may or may not "transfer the rights of the service contract" upon the sale-leaseback. The sale of equipment and corresponding transfer of the rights to ownership of equipment is clear cut per federal and state laws. But, the service contract is not.
Instead of purchasing the coverage yourself, we would buy the service contracts once the sale-leaseback transaction is complete so that the equipment is fully covered for the lease term. This just means we pay two parties—the company and the vendor. The company we pay for the equipment and the vendor we pay for the service contract.
Considering the difficulties that can come up when service coverage is part of the PO, we recommend opting out of the service contract with the equipment if you plan on doing a sale-leaseback. We can handle the service contract purchase when the sale-leaseback transaction is executed, and include it in the lease just like our “normal” leases.
Clients have sometimes asked us about PO swaps, which involve Excedr exchanging our PO for the one issued by the client to the manufacturer. However, this isn’t ideal, due to the complications that can arise when working with manufacturers to complete the PO swap. The ideal sale-leaseback involves Excedr buying the equipment directly from the client after they’ve purchased it.
For example, one client who wanted to do a PO swap ended up having their purchase order delayed by some months because the manufacturer wasn’t able to perform the swap. Ideally, you are able to get the lab equipment you need as soon as possible. We know how important it can be to your work, and do our best to speed up the process.
If the equipment you want to buy hasn’t been ordered, and you’re now considering a sale-leaseback for the instrument, you might be wondering if you can start the sale-leaseback process despite the equipment not being ordered.
You can start the sale-leaseback process before you buy the equipment by sending the manufacturer instrument quote to Excedr so that we can push it through to our underwriters. They will be able to start the underwriting process quickly and create an initial lease estimate for you while your PO is being processed.
If you approve the lease estimate, you can go ahead and buy the equipment without service coverage. When the equipment is delivered and fully paid for, and all verifying documents are provided to Excedr, we can finalize the sale-leaseback agreement with the precise service costs from the manufacturer, and then buy the equipment from you.
Sale-leasebacks are an effective way to recoup capital while keeping the equipment you originally purchased. This option is especially valuable when other financing avenues don’t make sense or funding is harder to secure. If you’re interested in freeing up cash tied to a recent equipment purchase, Excedr can help. We can buy back lab equipment you’ve bought within the last nine months, providing you with immediate funds to reinvest strategically.
Our leasing program offers operating leases with flexible, founder-friendly terms, helping biotech startups, middle-market companies, and enterprise organizations make the most of their cash and their lab. Reach out to discuss eligibility and get a lease estimate!
