A second position advance or a sale-leaseback on equipment you own

Both raise cash without a bank. One sells future receipts; the other sells an asset you already own and rents it back. The structural difference that drives everything: the advance is repaid out of revenue and the worst case is a cash-flow crisis, while the leaseback is repaid out of a fixed payment and the worst case is repossession of the machine that generates the revenue.

There is a second difference that appears on a tax return rather than a term sheet. Selling depreciated equipment triggers recapture of the depreciation you already deducted, as ordinary income, in the year of sale. Nobody mentions this at the quote stage, and it can be the largest single number in the transaction.

Where the sale-leaseback wins

• Leaseback: the funder advances 70% of the appraised figure — $91,000 — and leases the equipment back over 36 months at 12%. Payment $3,022.50, total paid $108,810, cost $17,810.
• Second-position advance: $120,000 at a 1.34 factor. Repay $160,800, cost $40,800, remitted at 14% of collections. On $95,000 of monthly sales that is $13,300 a month for about twelve months.

The leaseback costs less than half as much and takes $3,022 a month instead of $13,300. On raw cost and on monthly burden it is not close. If the equipment is a spare line, an older unit, a truck you could replace within a week, or anything whose loss would not stop production, take the leaseback.

Where the advance wins

So the honest comparison is $62,200 of usable cash with the production line pledged, against $120,000 with a claim on receipts. The advance costs $23,000 more and does not put the business's operating capacity on the table.

Two clauses to read before anything else

The prices are not on the same measure

The leaseback is quoted as a monthly payment over a stated term, with an end-of-term option that may or may not be included in the figure. The advance is quoted as a factor with no time dimension at all.

Put them on one page with four figures each: net cash received after tax, total dollars repaid, dollars per month, and the number of months. Then add a fifth line that has no number — what the funder can take if you stop paying. On this comparison that line is the decision.

The questions that settle it

1. What is the book value of the equipment and what will it sell for? The gap is your recapture exposure. Ask your accountant for the figure before you sign, not in March.
2. If this machine disappeared on Monday, what happens? If the answer is "we stop", do not pledge it for working capital.
3. What does my existing funding agreement say about additional financing and additional liens? Both structures can breach it.
4. What is the end-of-term position on the leaseback? A dollar buyout, a percentage put, or fair market value — these produce very different total costs and the monthly payment hides the difference.

What to ask for, and what to refuse

Ask the leaseback funder for the appraisal it is using and the basis — orderly liquidation or forced liquidation. Ask for the advance percentage against that figure and the end-of-term option in writing.

Ask your accountant for the recapture number in dollars before you commit. Ask the advance funder for the total repayment amount, the specified percentage and the reconciliation clause reference.

Have the equipment schedule ready: make, model, serial, year, original cost, accumulated depreciation, and any existing lien. Run a UCC search on your own entity first — a stale filing from a paid-off deal will stop a leaseback cold, and it takes weeks to clear.

Refuse a leaseback on equipment you cannot operate without, unless you have priced the alternative and the alternative is worse. Refuse to sign before the tax consequence is quantified. And refuse a second position without reading the first agreement's default clause in full.