Finance leases
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Finance leases
Updated: 5th February 2020
Finance leases are a form of equipment lease, and offer businesses access to high value assets without the capital cost. Sometimes known as capital leases, ownership is not transferred to the business at any stage, and the asset does not appear on the balance sheet.
Commercial finance leases are similar to operating leases in that terms are fixed over the contract period, but finance leasing is a longer-term arrangement over the majority of the asset’s useful economic life.
A further feature of finance leasing is that you are usually responsible for repairs, servicing, and maintenance.
How does finance leasing work?
The lender purchases the asset (plus the VAT), and leases it to your company on the pre-agreed terms. You may need to pay an initial deposit. At the end of the agreement the full cost of the asset, plus interest, will have been repaid – this is called the primary rental period.
When the lease comes to an end there may be several options available:
- Return the asset to the lender
- Agree with the lender to sell the asset and receive a proportion of the sale price
- Arrange a secondary rental period with the lender
It is worth bearing in mind that by the time the primary rental period has elapsed the asset will be nearing the end of its useful life, so depending on your business needs this could affect your decision.
What types of business use finance leasing?
Businesses looking for a cost-effective way to access high value pieces of machinery, vehicles, and equipment, may be interested in finance leasing as a funding option. The fact that it does not use up valuable working capital is a major benefit.
Finance leasing may be particularly suitable for manufacturing, transport, engineering, and aviation businesses. Essentially, organisations requiring the use of a key asset over the long-term may find finance leasing an attractive option.
What are the benefits of finance leasing?
- Working capital is protected
- You do not have to pay the VAT upfront, as with hire purchase
- If your business is VAT-registered, you can reclaim the VAT on your repayments
- Repayments can be offset against profits for tax purposes
- Flexibility can be built in to the lease terms according to the needs of your business
- If you choose to sell the asset at the end of the agreement, you benefit from a cash lump sum
- You have better control of cash flow
Are there any disadvantages?
- You do not take ownership of the asset at any stage
- Your business is responsible for maintenance, repairs, and servicing
Finance leasing is similar to hire purchase, but a key difference is that assets acquired via hire purchase appear on your balance sheet. This may be beneficial or a disadvantage depending on how your business is set up, and whether you would rather claim the repayments as an operating cost.
If you would like to know more about finance leasing and whether it is an appropriate form of funding for your business, Real Business Finance can help. We are finance leasing specialists and have contacts with over 50 of the best commercial finance lenders in the country. Please contact one of the team for a free consultation.
