Our recent article, ‘6 Essentials you need to know about hire purchase’ helped explain the nuances of hire purchase. In this article, we will do the same but for a finance lease, yet another finance facility for acquiring equipment. This finance facility may be better suited to you depending on your circumstances.
- Ownership position
With a finance lease the legal owner of the equipment is the lessor. The lessor buys the asset for the business and leases it to them over a term. In other words, they retain ownership, and in return, the lessee gets to use the equipment.
- End of term
Agreements run from 12 to 60 months. At the end of term, what happens depends on the agreement. The rentals may have been written down to zero, or there may be a balloon payment. If the rentals are written down to zero, ownership can pass to the lessor for a final purchase fee. If the rentals have not written down to zero and there is a balloon, this can be refinanced, or the equipment handed back. This means a finance lease offers you the ability to carry on using the asset at the end of the lease period.
The vast majority of finance leases have a balloon payment built into them, which effectively takes a portion of the equipment’s value and locks it away, so any repayments do not incorporate it. This considerably reduces the monthly payments compared to a hire purchase, but the balloon payment can be very high. On certain assets, this can make it a very expensive route to final ownership. For this reason, most businesses use finance leases to acquire new equipment they only need for a portion of its life.
- Risk and reward
With a finance lease the substantial risk and rewards of ownership pass to the lessee, despite the lessor retaining ownership during the term. This is because the asset will appear on the lessee’s balance sheet, as opposed to an operating lease, where it does not. Because it shows on the balance sheet, outstanding rentals under a finance lease are represented as a liability. However, this does have a benefit …
- Corporation tax deductible
The accounts depreciation under a finance lease is corporation tax deductible. The finance charges are also a tax-deductible business expense, because they are not part of the capital cost of the asset. Depending on the value of the asset and how long you intend to keep hold of it, this may be of great benefit to your accounts.
- Easier to obtain than standard finance
Finance leases are easier to obtain than standard finance or loans because there is a valuable asset providing fallback. If you have an average or poor credit history, lenders are more likely to approve a finance lease than regular finance, of which the latter puts a lump sum in your account to do with as you wish.
To discuss a finance lease for your business, call us today on 01234 240 155.