Construction companies are well-positioned to take advantage of the benefits of sale leaseback financing. It can be a smart source of cash for a business that understands how to use it effectively.
Because construction companies typically own one or more pieces of heavy equipment, that equipment can be used as collateral. The business can borrow up to 50% of the liquidation value of the equipment and pay it back over a 3-5 year period with interest, while continuing to use the equipment. This type of deal can be a good option for businesses with imperfect credit that would not otherwise qualify for a traditional small business loan.
However, sale leaseback financing does come with some risks that a company should fully comprehend in advance. First, what type of equipment will qualify for financing? The best candidate is heavy equipment that is worth several thousands of dollars, bears a serial number or other specific identifier and can be sold at auction in the event of default.
Next, how much can a company borrow against this equipment? If the equipment is worth $100,000, the company can borrow up to $50,000. Bear in mind that the value assessed is not the fair market value but the liquidation value. Liquidation value is what the equipment would be worth at auction.
Finally, what happens if the company defaults on the payments? Because the equipment is used as collateral in sale leaseback financing, it can be taken to satisfy the debt. Recall that the equipment is worth twice as much as the debt. Therefore a company should be certain that they can make all the payments on time and in full, or risk losing a valuable piece of equipment that is essential to their business.
To mitigate these risks, a construction company should be extremely clear upfront how it plans to use the infusion of cash. Ideally, the money should be put toward initiatives that will increase revenue as soon as possible, so that the business will be sure to have monthly income sufficient to cover both operating expenses and monthly payments. These could include purchasing additional heavy equipment or hiring more workers so that the business is better positioned to take on more work.
Sale leaseback financing is an especially accessible source of funds for construction companies, as they typically own the sort of heavy equipment that will qualify. Likewise, it is a good option because the company can continue to use the equipment in their work even while they are making the monthly payments.