What is a Conditional Sales Agreement
A conditional sales agreement or often called a conditional sales contract is a financing arrangement where a buyer takes possession of an item (asset), but the asset's title and right of repossession remain with the seller until the buyer pays the full purchase price.
The business can take possession of the property as soon as the agreement is in force, but does not own the property until it has paid for it, which is usually done in installments. If the business defaults on its payments, the seller will take possession of the item.
Conditional sales agreements have often been utilized during the financing of machinery and equipment, as well as various forms of real estate.
BREAKING DOWN Conditional Sales Agreement
Acquiring property through a conditional sales agreement may allow the business to deduct the interest expense and depreciate the item on the business's tax return. A conditional sales agreement may not require a down payment and may also have a flexible repayment schedule.
Other benefits to a buyer include access to an asset before full payment; this can create financial leverage for a business. Buyers with weaker credit histories may also tap otherwise unavailable credit by using seller provided financing — this is particularly effective for younger business entities.
A conditional sales agreement also protects the seller if the buyer defaults on required payments. Since the title does not transfer to the buyer until the completion of the conditions, the seller remains the legal owner throughout the duration of the contract. This makes it easier for the seller to legally repossess or reclaim possession because they do not have to use expensive foreclosure proceedings against the buyer after a title has been transferred prematurely.
Strong contracts will layout the criteria for determining when the buyer is in default of their obligation. It should also describe the procedure for the seller to recover any property: this typically includes a clause giving the seller the right to enter the premises to take possession of equipment and other personal property.