There are many financing options in the industrial marketplace and it’s important to get a clear understanding of some of the benefits of financing equipment through equipment term loans versus a purchase leaseback. Understanding the differences in costs and legal structure between these two financing options is paramount.
1. Retention of Ownership – The major difference between them is ownership and who has the rights to depreciate the machinery. While both financing options allow for uninterrupted use of the machinery, only a term loan allows for the retention of ownership of the assets by the borrower. With a term loan, because the borrower retains ownership, they also retain the right to the depreciation of the machinery over the duration of the financing.
2. P&L – With a term loan the interest portion of the repayment is expensed, whereas with a purchase leaseback the entire payment hits the P&L.
3. New Acquisitions – Acquiring new assets or selling surplus is often easier within the legal terms of a term loan. Even when the ultimate goal is to unlock equity in order to purchase additional assets, the value of those additional assets can be included in the terms of the term loan from the start. Purchase leasebacks don’t always have that level of flexibility.
4. Liquidation of Assets – While not always pleasant to discuss, the reality is that should a borrower fail to stay current, regardless of the type of financing, the equipment needs to be liquidated. With a term loan, any funds received above what the lender is owed, are either provided to the borrower or other secured lenders. With an equipment purchase leaseback, the lender receives all the funds from the liquidation.
Overall, while both may have their benefits, on paper, the fiscal health of a company in turnaround with a term loan may be looked upon more favorably by traditional lenders.
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