Should You Sell and Lease Back Your Equipment for Cash?

A sale-leaseback is two transactions stitched into one closing. First, you sell equipment you already own, often close to fair market value, to a leasing company, a bank's leasing arm, or a specialty lender. Second, that same buyer immediately leases the equipment back to you, usually for a term matched to the equipment's remaining useful life.

The cash from the sale hits your account right away, and you keep operating the equipment without interruption. What changes is who holds title: the lessor now owns the asset, and any equipment loan you already had gets paid off and replaced by lease payments. If the equipment was unencumbered, you've converted a static, illiquid asset into working capital. This matters most for companies where growth outpaced financing: you bought equipment for cash or a short-term loan, and you'd rather have that capital back now.

Not every asset makes a good leaseback candidate. Lessors want equipment with a resale market: forklifts, CNC machines, delivery vehicles, standard servers, and medical imaging equipment all hold value because a lessor can remarket them if you default. Custom-built machinery, heavily depreciated IT hardware, and anything tied to a single obsolete process are harder to place, and a lessor will either decline the deal or price it aggressively to cover the risk.

Get an independent appraisal before you talk to a lessor, not after. Equipment appraisers who specialize in your asset type will give you a realistic fair market value and an orderly liquidation value, and knowing both numbers before you negotiate keeps you from anchoring on book value, which is usually higher than what the equipment would actually fetch.

A sale-leaseback's payment carries an implicit interest rate, even though it's structured as rent rather than a loan payment. Work it out before you compare offers: take the total lease payments over the term, subtract the sale proceeds, and annualize the difference against the amount you received. That's what you're actually paying for the cash, and it's often higher than a conventional equipment loan because the lessor is also pricing in remarketing risk.

If your reason for doing the deal is to stretch runway rather than fund growth, that distinction matters. A company working to hold its burn multiple down through a rough patch¹ is better served by the cheapest capital available, and a leaseback should only win that comparison when a straight loan isn't available on better terms.

The purchase price is only half the negotiation. Before you sign, check what the lease requires at the end of the term: some leases include a nominal buyout, some require you to return the equipment in a specified condition, and some renew automatically unless you give written notice by a deadline that's easy to miss.

Also check the casualty and maintenance clauses. If the equipment breaks down or is damaged, you're typically still on the hook for the remaining payments even if you can't use it, so ask whether the lessor requires insurance naming them as loss payee, and whether routine maintenance has to be documented to avoid a dispute at return.

Terms to confirm about the end of the lease:

• Whether the lease includes a nominal buyout, so you can own the equipment outright again when the term ends.
• What condition the equipment must be in when you return it, and what happens if it falls short of that standard.
• Whether the lease renews automatically unless you act, and how far ahead of expiration you have to give notice.
• How the payments compare with a straight equipment loan once you back out the implicit interest rate, so buyout terms are priced into your comparison.

Under current lease accounting rules, most equipment leases, including leasebacks, land on your balance sheet as a right-of-use asset and a lease liability, whether the lease is classified as operating or finance. That's a real change from the old off-balance-sheet treatment, and it can affect debt-to-cash-flow ratios your other lenders track, so loop them in before you close a leaseback that could trip a covenant.

On the tax side, selling equipment you've already depreciated can trigger depreciation recapture, and a leaseback structured more like a financing than a true sale may not get the tax treatment you expect. This is jurisdiction and situation specific enough that your CPA or tax attorney should review the structure before you sign, not after.