A Finance Lease is a popular form of asset finance that lets businesses use equipment, vehicles, or machinery for a fixed period without having to purchase them outright. Essentially, you pay regular lease rentals to a finance provider who owns the asset. At the end of the lease, you can either return the asset, continue leasing it at a nominal rental, or sell it on the finance provider’s behalf (receiving a rebate or share of the sale proceeds, depending on the agreement).
How Does Finance Leasing Work?
1
Find your business need.
2
Sign the agreement
3
Use and Look After the Asset
4
Choose Your End of Term Option
Key Benefits of a Finance Lease
Lower Upfront Costs
Avoid large capital outlays by paying fixed rentals over the lease term, helping you maintain cash flow for day-to-day operations.
Potential Tax Advantages
In many cases, lease payments may be treated as operating expenses, offering potential tax benefits (consult a tax adviser for specifics).
Flexibility
At the end of the lease period, you can decide whether to return the asset, extend the lease, or facilitate its sale, giving you adaptable options based on your business needs.
Up-to-Date Equipment
A Finance Lease arrangement allows you to use modern or more advanced equipment without committing the capital required to purchase it outright.
Why choose a finance lease?
Ownership
For assets with a longer useful life, a finance lease can be a suitable choice. Under a finance lease, ownership of the asset passes to the lessee once the lease term concludes. By contrast, with an operating lease, the leasing company retains ownership both during and after the lease period.
Flexible Payments
One key advantage of a finance lease is its adaptable repayment structure. Lenders can customise payment plans that align with your business’s cash flow requirements, helping you manage expenses more effectively.
End-of-Term Options
Finance leases often provide several choices at the end of the agreement. You can return the asset to the lender for resale, sell it to a third party, or opt for a secondary lease period, whichever option best suits your business needs.
A finance lease is a type of asset finance where a lender buys an asset on behalf of a business. The business then leases it for a set period and pays regular installments, gaining most of the benefits of ownership without purchasing the asset outright.
How does a finance lease differ from an operating lease?
In a finance lease, the lessee (your business) assumes many risks and rewards of owning the asset. At the end of the term, you may continue leasing or sell the asset on the finance provider’s behalf. In an operating lease, the ownership and most of the risks remain with the leasing company, and you typically return the asset at the end of the lease.
Who owns the asset in a finance lease?
The finance company retains legal ownership throughout the lease term, but you effectively control and use the asset as if it were your own. Depending on the agreement, you may have the option to purchase it at the end of the lease or help facilitate its sale.
What are the typical end-of-term options?
Common end-of-term options include returning the asset to the lender, continuing to lease at a reduced payment, or selling the asset on the lender’s behalf. Exact options depend on your agreement.
Do I need to pay a deposit for a finance lease?
It varies. Many finance leases do require an upfront payment or deposit, which can be a percentage of the asset’s value. The exact amount depends on factors like your credit profile and the asset’s cost.
Is maintenance my responsibility in a finance lease?
In most finance lease agreements, you are responsible for maintenance, repairs, and insurance. This arrangement allows the finance provider to offer lower monthly payments, since you handle upkeep.
How long is a typical finance lease term?
Terms can range from one year to seven years or more. The specific duration depends on the type of asset and your business’s needs.
Can I end a finance lease early?
You usually can, but there may be early settlement fees or penalties. Always review the terms of your agreement or speak to your finance provider to understand the cost implications.
Does a finance lease appear on my balance sheet?
Under most accounting standards, finance leases are recorded on your balance sheet. The asset and corresponding liability appear, reflecting that you bear the risks and rewards of ownership.
Can finance leases be used for different asset types?
Yes. Finance leases can fund a wide range of assets, including vehicles, machinery, IT equipment, and specialised tools. The key requirement is that the asset has a reasonably predictable resale value.
How do lenders assess eligibility for a finance lease?
Lenders typically review your business’s financial health, credit history, and cash flow. They also evaluate the asset’s value and how easily it could be resold.
What happens if the asset’s resale value changes?
Depending on your agreement, you may share in the proceeds if the asset sells above a certain amount. If the value drops below expectations, you could be liable for any shortfall.
Are lease payments tax-deductible?
In many cases, lease payments can be treated as a business expense and may be tax-deductible. Always consult a tax professional for advice specific to your situation.
Is finance leasing better than an outright purchase?
It depends on your goals. A finance lease spreads costs over time, preserving cash flow, but you do not gain immediate ownership. Buying outright offers ownership at once, but it can tie up capital you may need elsewhere.
How are monthly payments calculated?
Monthly payments are usually based on the asset’s value, the length of the lease, any deposit or balloon payment, and the interest rate set by the lender.
Can I upgrade the asset during the lease term?
Some finance lease agreements allow asset upgrades. You may need to renegotiate the terms or roll the remaining lease balance into a new agreement.
What happens if the asset becomes obsolete?
If the asset is no longer useful or becomes outdated, you can discuss early termination or upgrades with the finance provider. However, fees or additional costs may apply.
Can I refinance my existing finance lease?
In some cases, yes. You might convert the agreement into a different financing product or extend the term to reduce monthly costs. This depends on the lender’s policies and your payment history.
Is insurance mandatory?
Yes. Since the finance company legally owns the asset, they will require adequate insurance coverage to protect against damage, loss, or theft.
How do I get started with a finance lease?
Begin by identifying the asset you need and contacting a finance provider. They will assess your business’s financials and propose an agreement detailing the lease term, monthly payments, and end-of-term options.
