Sale and Leaseback on Equipment You Already Own: What It Costs a Kelowna Business
A common position for an Okanagan contractor, farmer or shop owner: the equipment yard is full and the bank account is not. You own an excavator, a service truck, a CNC machine or a line of implements outright, and every dollar you spent on them is sitting there doing nothing for your cash flow.
A sale and leaseback turns that back into working capital. You sell the equipment to a lessor for its assessed value, receive the proceeds, and lease it back so it never leaves your yard. You keep using it, and you now have cash.
It is a legitimate and widely used tool. It is also one that deserves a careful look at the total cost, because the convenience is real and so is the price.
How the structure works
1. You identify equipment you own free and clear, or with a small remaining balance that can be paid out from the proceeds.
2. The lessor assesses its current market value, usually from serial numbers, hours or mileage, condition, and comparable sales.
3. They offer to purchase it at a value, typically a percentage of assessed market value rather than the full amount.
4. You sell it to them and receive the funds.
5. A lease agreement is executed for a defined term with a defined payment.
6. At the end of the term you either purchase it back, commonly for a nominal or a stated amount depending on the lease type, or return it.
The equipment does not move. From the outside, nothing about your operation changes.
What determines the amount you receive
Asset type and how well it holds value. Well known makes of heavy equipment with strong resale markets attract better advance rates than specialised machinery with a thin buyer pool. A lessor is lending against what they could recover, so an asset that is easy to sell is worth more to them.
Age, hours and condition. Straightforwardly. Service records help.
Whether it is titled or serialised. Registered, serialised assets are easier to secure and easier to value than an assembly of unregistered items.
Whether it is free and clear. Any existing lien has to be dealt with, usually paid out from the proceeds, which reduces what you receive.
Expect the advance to be a portion of assessed value rather than the full number. The gap is the lessor's margin of safety.
What determines the rate
Credit quality. Time in business, financial statements, payment history and the strength of any personal guarantee.
Term length. Longer terms lower the payment and raise the total cost.
Asset quality, as above, because the asset is the security.
Structure. Whether there is a security deposit or advance payments, whether the buyout is nominal or a stated residual, and whether payments are seasonal.
That last one is worth asking about specifically in this region. Many Okanagan businesses are seasonal, and lessors can often structure payments to match: heavier in the working season, lighter through the winter. Seasonal structuring will not lower the total cost, but it very much improves whether the payments are survivable in February. Ask for it if your revenue is seasonal.
The honest cost comparison
A sale and leaseback is more expensive than a bank operating line, and less expensive than most short term alternative financing. That is the middle of the range it occupies.
The comparison worth making is not against the cheapest theoretical capital, it is against the capital you can actually get. If your bank will extend an operating line at a good rate against your receivables, take it. Many businesses in a growth or a rough patch cannot, and the choice in front of them is a leaseback or nothing.
The comparison to run before signing:
- Total of all payments plus the buyout amount, minus the cash you received. That is the cost of the money.
- Expressed as an annual rate over the term, so it can be compared to anything else.
- Against what the equipment will still be worth at the end of the term.
Any lessor should be willing to state the total cost of the arrangement plainly. If a proposal is presented only as a monthly payment, ask for the total.
When it makes sense
- Bridging a real, identified gap where the cash solves a specific problem: making payroll through a slow quarter, funding materials for a contract already awarded, covering a receivable that is late but good.
- Funding growth that returns more than the cost of the money. Cash out of an idle machine to buy the one that lets you take a bigger contract.
- Consolidating expensive short term debt into something cheaper and longer.
- Preserving a bank relationship and its covenants by financing outside the operating line.
When it does not
- Covering ongoing operating losses. A leaseback converts an owned asset into cash and a monthly obligation. If the business is losing money, it now loses money and has a payment. This is the most common way businesses make a bad situation worse.
- On equipment you may need to sell. Once it is leased, disposing of it means paying out the lease.
- When a cheaper facility is actually available. Ask the bank first.
- On an asset near the end of its working life, where you may be paying for the use of a machine that is failing.
The questions to put to your accountant
This is genuinely an accountant's question, and it is worth an hour of their time before you sign. The areas that matter:
- Whether the transaction triggers recapture on capital cost allowance already claimed, which can create a tax liability in the year of sale. This is the most common unpleasant surprise and it is entirely foreseeable.
- How the lease will be classified for accounting purposes, and how it will appear on your statements. This matters if you have covenants tied to your balance sheet.
- Deductibility of the lease payments versus the depreciation you were claiming.
- GST treatment on both the sale and the lease payments.
None of this makes a leaseback a bad idea. It makes it an idea to price accurately, including the tax consequence, before you decide.
What to read carefully in the agreement
- The buyout: nominal, fair market value, or a stated amount. This changes the total cost materially.
- Whether you can pay out early, and what the prepayment cost is.
- Who insures the equipment, at what level, and who is named.
- Maintenance obligations and any use restrictions.
- What constitutes default, and what the remedies are.
- Whether a personal guarantee is required and its extent.
- Any documentation, administration or end of term fees.
- What happens if the equipment is damaged or destroyed.
The early payout terms deserve particular attention. A business doing a leaseback to bridge a gap often expects to be in a better position in a year, and a lease with no reasonable early exit removes that option.
Frequently asked questions
How fast can it be arranged?
Faster than most bank facilities, which is a large part of the appeal. Straightforward transactions on good assets with clean documentation move quickly. Having your equipment list, serial numbers, hours and financials ready is what shortens it.
Does my equipment leave my possession?
No. It is a paper transaction. The machine stays in your yard and in your operation throughout.
Can I do this on partially financed equipment?
Often yes. The existing balance is paid out from the proceeds and you receive the difference. Expect the net to be smaller than the assessed value would suggest.
Will this affect my ability to borrow later?
It creates an obligation that a lender will see, and it removes an unencumbered asset from your balance sheet. Both matter to a future lender. Factor it in.
Is it available on a mixed fleet of smaller items?
Sometimes, though serialised, individually valuable assets are easier to structure than a large number of small unregistered items. Ask.
A Kelowna option worth talking to
*Disclosure: EquipEASE Lease Co is a business listed on the Okanagan Trade Directory. Their directory listing shows a 5.0 Google rating across 4 reviews at the time of writing, which is a small sample, so ask for references from businesses in your own sector.*
EquipEASE Lease Co is an equipment leasing business serving the Okanagan, with Kyle as the contact.
See their Okanagan Trade Directory listing.
Whoever you approach, ask for the total cost of the arrangement in dollars, not just the monthly payment, and take that number to your accountant before you sign anything.