What is Finance Leasing?
Finance Leasing Explained
Finance Leasing is an asset finance route which businesses can access via commercial hire purchase arrangements.
The way in which this route to finance operates and the benefits in which it provides are slightly different from that of other hire purchase agreements, in that:-
- the lessee (customer or borrower) will select an asset (equipment, vehicle, software);
- the lessor (finance company) will purchase that asset;
- the lessee will have use of that asset during the lease;
- the lessee will pay a series of rentals or instalments for the use of that asset;
- the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee;
- the lessee has the option to acquire ownership of the asset (e.g. paying the last rental or bargain option purchase price);
The benefits of a Finance Lease for businesses
- Business can avoid cash flow complications in purchasing assets outright;
- Use the equipment only while they need it, thus avoiding asset depreciation;
- Benefit from fixed monthly repayments to make cash flow management simpler;
- Deduct the cost from taxable income as a business trading expense.
Being able to successfully access a financing lease will allow a business to use the chosen asset without having to purchase it outright. An asset finance company simply buys it on the business’s behalf before leasing it back to them for a fixed period.
The type of lease can if required to be renegotiated at the end of the repayment period. However, should the asset which was on finance lease then be no longer be required, the leasing company will arrange the sale of the asset to a third party, with the original leasing business keeping a portion of the takings.
Finance Lease vs Operating Lease
The main difference being, via a finance lease the maintenance costs on the asset remain the responsibility of the business who is leasing, whereas an operating lease gives the asset finance company liability for repairs, meaning that the business who is leasing the asset avoids any unexpected costs.
Interested in Finance Leasing?
Finance leasing helped us to fund and manage our equipment purchases for our manufacturing company. Resulting in the creation of extra jobs and an increase in productivity.
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