Acquiring expensive equipment outright isn’t feasible for everyone, and even if it is financially, there may be no point if the business only intends to keep hold of the equipment for a short time – i.e. for only part of its usable life.
This is where a finance lease comes into play. With a finance lease, you get unlimited use of equipment over a period of time, after which the asset is returned.
If the lessee plans ahead, this means it’s possible to take out a new lease as the old one ends and acquire newer, even better equipment with low initial outlay.
There are six other key benefits of a finance lease for your business:
Small initial outlay – this can be as little as one month’s rental. Increasing your initial rental has the effect of lowering your monthly payments.
Monthly payments – these are spread over a set term dependent on the value of the equipment, and what is manageable for you.
Opportunity to extend – finance leases often give you the opportunity to extend the lease at the end of the agreement. An example of where this may be desired is if you still need the equipment to fulfil an order or contract.
Opportunity to sell – you can also opt to sell the asset at the end of the agreement. If you choose this option, the sale will be managed by the lessor and most of the profit from the sale will be passed onto you (if there is any).
Tax deductible – the monthly rentals of a finance lease are fully tax deductible. The VAT on a finance lease is also fully reclaimable as a capital allowance.
Keeps cash in your business – this is perhaps the most important benefit for businesses without the luxury of a cash stockpile. A finance lease does not require a large initial outlay or payment further down the line. This keeps cash in your business and doesn’t disrupt your cash flow to any great extent.
What can be purchased on a finance lease?
Finance leases are most popular with vehicles of the domestic, commercial and industrial varieties, as well as plant equipment, machinery and electronics like computers.
Mostly however this finance facility is used to acquire high-ticket items because there is a balloon built into the agreement which isn’t repaid during the course of the agreement. This has the effect of lowering monthly rentals considerably versus a hire purchase, which is where you pay off the full purchase price over time.
Ultimately, you will never own the equipment leased on a finance lease, unless you trigger an option to purchase. The benefit of this is lower payments over the course of the agreement. The downside is if you do opt to purchase, you will end up paying way more than on a hire purchase to begin with. For this reason, a finance lease is best used to acquire assets you do not intend to own outright.
