Finance leases allow businesses to benefit from the use of an asset without having to purchase it, keeping their cash flows healthy and avoiding the problems with asset depreciation as it grows older. It involves the asset finance company purchasing an asset on your behalf before leasing it back to you for a fixed period.
Unlike hire purchase, a finance lease allows the lease to be renegotiated following the repayment period. Should the asset no longer be required, the leasing company will arrange the asset’s sale to a third party, with the lessee keeping a portion of the takings.
Whilst maintenance costs on the asset are the lessee’s responsibility through a finance lease, an operating lease gives the asset finance company liability for repairs, meaning your business avoids any unexpected costs.
What are the benefits of a finance lease?
- A finance lease avoids the need for a business to pay for an asset outright, keeping working capital free to invest in your day-to-day activities.
- Finance leases also negate the problems with asset depreciation; as your business never owns the asset outright, you will not have to sell the asset at a second-hand price.
- It is ideal for companies who require the use of an asset for a short period.
- Businesses are able to deduct the cost of lease rentals from taxable income as a trading expense through a finance lease.
- Repayments on the lease are made in monthly instalments at a fixed rate, making cash flow management a simple task.
- Asset finance companies are responsible for the asset’s maintenance through an operating lease, ensuring your company will not face any unexpected costs.
Finance lease vs operating lease
Because finance leases and operating leases are very similar products, it can be difficult to decide which one is best equipped to provide the cash flow support your business requires when purchasing an asset.
Both bring their own benefits and different asset finance companies can be better suited to one or the other, making it important to seek the expertise a commercial finance broker can provide.
