Finance leases

How a finance lease can help your business

Finance leases are equipment leases that provide businesses with access to valuable assets without the upfront cost. Also called capital leases, ownership remains with the leasing company, and the asset doesn’t reflect on the balance sheet.

Commercial finance leases resemble operating leases with fixed terms, but finance leasing extends over the asset’s economic life. Additionally, you typically handle repairs, servicing, and maintenance under finance leases.

How does finance leasing work?

The lender buys the asset (including the VAT) and leases it to your company based on pre-agreed terms. You might have to make an initial deposit. By the agreement’s end, you’ll have repaid the total asset cost plus interest, known as the primary rental period.

Upon lease completion, you have several options:

• Return the asset to the lender
• Work with the lender to sell the asset, receiving a share of the sale price
• Arrange a secondary rental period with the lender

Consider that as the primary rental period concludes, the asset nears the end of its useful life, which could influence your decision based on your business needs.

What types of businesses use finance leasing?

Businesses seeking a cost-effective method to acquire high-value machinery, vehicles, and equipment may find finance leasing appealing as a funding solution. The significant advantage lies in not depleting essential working capital.

Finance leasing could be well-suited for manufacturing, transport, engineering, and aviation enterprises. In essence, organisations needing prolonged access to a vital asset may see finance leasing as an attractive option.

What are the benefits of finance leasing?

• Preserves working capital
• No upfront VAT payment, unlike hire purchase
• VAT on repayments can be reclaimed for VAT-registered businesses
• Repayments are tax-deductible, offsetting against profits
• Lease terms can be flexible to suit your business needs
• Opting to sell the asset at the agreement’s end provides a cash lump sum
• Improved control over cash flow

Read More:

• Hire purchase
• Invoice Finance
• Invoice Finance Market Compared: Factoring and Discounting Rates & Costs
• The Most Common Industries that Use Invoice Finance, Factoring and Discounting
• Understanding the Advantages and Disadvantages of Invoice Factoring

Are there any disadvantages?

• Ownership is not taken at any point
• Your business handles maintenance, repairs, and servicing

Finance leasing shares similarities with hire purchase, but a notable difference is that assets acquired through hire purchase reflect on your balance sheet. This can be advantageous or disadvantageous, depending on your business structure and whether you prefer categorising repayments as an operating cost.

For more information on finance leasing and its suitability for your business funding needs, Vanguard Insolvency is here to assist. As finance leasing specialists, we have connections with over 50 top commercial finance lenders nationwide. Feel free to reach out to our team for a complimentary consultation.