Sale Leaseback Disadvantages

A sale-leaseback can unlock cash tied up in equipment by selling the asset to a financier and leasing it back. It’s powerful—but not perfect. Below are the main drawbacks Canadian SMEs should evaluate before signing. If you’re still deciding, compare structures on our Refinancing & Sale-Leaseback page and test scenarios with the calculator.

Key disadvantages (and how to mitigate them)

1) Higher total cost than a traditional loan
Lease payments (plus fees and an end-of-term buyout) can exceed the all-in cost of a secured equipment loan—especially on longer terms or older assets.
Mitigate: Price a comparable loan, or blend: refinance existing debt with business refinancing and keep only part of the need in a lease.

2) Loss of legal ownership and control
Title transfers to the lessor. You’ll face restrictions on modifications, relocation, subleasing, or resale; insurance and maintenance standards are contractual.
Mitigate: Negotiate clear use/relocation rights and maintenance carve-outs; confirm downtime responsibilities in the lease. See equipment leases.

3) Residual/buyout risk
End-of-term obligations (e.g., 10% or FMV) create a balloon you must plan for; market values can move against you.
Mitigate: Model a conservative residual in the calculator and align term with remaining useful life.

4) Valuation & advance-rate frictions
You may not receive as much cash as expected. Lenders haircut FMV, limit LTV on older/specialized gear, and deduct fees and lien payouts.
Mitigate: Validate eligibility first (Eligible Equipment). If proceeds fall short, supplement with asset-based lending or a working capital loan.

5) Tight covenants; default sensitivity
Missing payments can trigger repossession, cross-default, or acceleration. Covenants may cap additional borrowing or require financial reporting.
Mitigate: Choose realistic terms; keep a liquidity buffer or revolving capacity via an equipment line of credit.

6) Break-costs & prepayment penalties
Early termination or restructuring can be expensive (make-whole amounts or fixed break fees).
Mitigate: Ask for transparent prepayment schedules and test early-buyout math before signing.

7) Accounting & tax complexity
Lease classification, deductibility, and capitalization can affect earnings and taxes.
Mitigate: Have your accountant review the draft; compare after-tax outcomes vs. loans/refis using the calculator.

8) Operational disruption at closing
Appraisals, PPSA filings, lien payouts, and vendor acknowledgements can cause brief downtime.
Mitigate: Time closing between jobs; confirm who handles payouts, plates, and endorsements in the lease.

9) Not a cure for structural cash-flow issues
If margins or collections are the real problem, a sale-leaseback may only defer pain.
Mitigate: Pair with invoice/freight factoring, smarter terms, or cost adjustments.

When a sale-leaseback still makes sense

• You own equipment with strong resale value and need cash quickly for payroll, deposits, or expansion.
  
  
• You prefer predictable payments and want to preserve bank lines for other purposes.
  
  
• You plan to buy the asset at term-end or upgrade on a schedule.
  
  

If your priority is the lowest total cost and you can post collateral, a conventional equipment loan or term loan may be better.

Quick pre-sign checklist

• Compare 2–3 structures (loan, leaseback, refinance) in the calculator.
  
  
• Stress-test payments for a mild revenue dip.
  
  
• Confirm residual and prepayment math in writing.
  
  
• Ensure insurance/maintenance obligations match your operations.
  
  
• Align term with useful life and resale outlook.
  
  

FAQ: Disadvantages of Sale-Leasebacks

Is a sale-leaseback always more expensive than a loan?
Not always, but it often is. Price both options and include fees and the buyout.

What happens if I default?
The lessor can repossess the asset faster than a bank might under a loan. Read default and cure provisions carefully.

Can I negotiate the buyout?
Yes. Fixed buyouts (e.g., 10%) reduce uncertainty vs. FMV; they may raise payments slightly.

Will my bank covenants be affected?
Possibly. Some agreements restrict additional liens or indebtedness. Get banker and accountant sign-off first.

Can I finance fees and taxes?
Often, yes—but rolling them in increases total cost. Model both ways in the calculator.

What if I need more cash than the advance allows?
Blend tools: leaseback plus working capital or ABL on receivables/inventory.

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If you’d like an apples-to-apples comparison (cost, covenants, and cash today), feel free to contact our credit analysts via Contact Us. You can also learn more About Us and the industries we serve.

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