Leaseback – Why credit matters

For a leaseback transaction, in which the owner of equipment or real estate sells the asset for cash, then leases it back, does the business credit and personal credit matter?

In such a transaction,  if the wholesale or liquidation value of the asset covers the balance of the leaseback, then does credit matter? In fact, credit does matter.    In the event of non-payment and default, the value of the asset, especially equipment, may depreciate faster than the balance of the debt.

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In such a case, if business and personal credit were not reviewed for the leaseback, the lender may find themselves upside down and facing as loss on the transaction in a default situation.

Further, regardless if the value of the equipment or real estate asset, the lender’s preference is almost always for the borrower in the leaseback to pay as agreed rather than default.    In a default involving equipment, the lender is typically forced to hire an outside vendor to repossess the equipment, transport to a venue to liquidate, and will often receive lower than the balance owed on the debt, resulting in a loss.

Additionally, only a review of the business and personal credit can uncover judgement, collection, and tax issues that can jeopardize the lenders equity position in the transaction.

For these reasons, the lender in a leaseback will always want to review the business and personal credit of the potential borrower.

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