FINANCE LEASE EXPLAINED
How does a finance lease work?
A finance lease is a method of financing assets where they remain the property of the finance company that hires them and the lessee pays for the hire of the asset or assets.
The lessor charges a rent as their reward for hiring the asset to the lessee. The lessor retains ownership of the asset but the lessee gets exclusive use of the asset (subject to meeting the terms of the lease).
A finance lease transfers substantially all of the risks and rewards of ownership of the asset to the lessee. Using a finance lease means that the asset will appear on the lessee’s balance sheet, with outstanding rentals represented as a liability.
Finance leases are either fully amortising (the rentals write the asset down to zero at the end of the term of hire) or to a balloon rental (this may equal the estimated value of the asset at the end of the term of hire).
The balloon rental is a contracted sum that the lessee pays at the end of the term of hire but, of course, the lessee has had the benefit of paying a lower rental during the term itself. Leases with balloon rentals are usually available where the asset has an intrinsic value which will be at least equal to the balloon rental.
At the end of the lease term, the lessee may be offered a lease on the asset for a secondary period at anything between a nominal ‘peppercorn’ rental and a commercial rent.
What are the benefits of a finance lease agreement?
Set regular payments
Minimal cost upfront
Rentals are usually Corporation Tax deductible
Potential to carry on using the asset at the end of the lease period
Additional line of finance that may not affect core banking arrangements
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Who is responsible for the maintenance of the asset?
It is worth noting that while you are in possession of the asset on a finance lease, you will be responsible for the maintenance of the asset and any servicing that may be required. In some instances a separate maintenance contract may be possible – this should be discussed with the leasing company.
With a finance lease, you will be held accountable for any damage caused to the asset, so it is important to ensure you have an insurance policy for the asset or assets in question that covers all potential damages that could arise over the course of the lease.
What happens at the end of the lease?
At the end of the finance lease contract you may be given the opportunity to extend the lease or to return the asset to the finance company. This is dependent on the terms of the agreement, but in most cases you’ll find that at the end of the primary lease period you will have the option to extend your lease. If an extension is not required, the asset will be returned to the finance company, normally to be sold on.
Alternatively, the asset could potentially be sold to a third party by the lessee. In this instance the lessee would act on behalf of the lessor and may be given a rebate of rentals equating to a part of the sales proceeds. This will again depend on the terms outlined in the finance lease agreement.
Where can I get the best finance lease deal?
At Maxxia, we provide businesses with finance lease agreements alongside our full range of finance products.
By helping you to remove the risk of outlaying a significant amount of capital upfront you will be able to improve your business, whether that means new technological equipment, vehicles, or machinery. And because we understand the importance of investing in new equipment for your company to progress, we can offer you expert advice on which options will best suit your situation.