What is a finance lease?
A finance lease is a way for you to gradually pay for an asset- such as a car, whilst it remains the property of the provider. Finance lease does not require you to pay the VAT upfront and allows you to spread it across the term of the agreement on top of the monthly payments.This type of finance means that you would not own the item but you do get exclusive use of it. The lessor remains the prime owner throughout the contract. Unlike an operating lease, finance leases require you to take responsibility for the asset during the time of the contract. Unlike hire purchase, these monthly payments do not necessarily contribute towards eventual ownership although it can be an option.
At the beginning of the lease both parties agree on the usage parameters, payments and term times. A“ balloon payment” which is a larger payment at the end of the contract can also sometimes be arranged. Finance leasing is often used for vehicles and is an effective way of allowing companies access to assets they could not afford to purchase outright.
How does a finance lease work?
Finance lease involves gradually paying off an asset in monthly instalments. Normally there is a larger one off payment at the start of the contract. Throughout the lease the risk and reward of the asset becomes your responsibility but the asset still legally belongs to the lender. This means that you need to maintenance and take care of the asset. A financial lease is more of a long term concept than an operating lease and often the agreement can not be cancelled during the primary period. At the end of the contract ownership remains with the lender however there may be an opportunity to extend the lease if required or in some cases purchasing the asset can be discussed. A finance lease must be recorded in a businesses accounting system whereas an operating lease is known as an “off the balance sheet lease”.
What can I use a finance lease for?
Finance leases are suitable for businesses who need access to vans, cars or other vehicles. Finance leases would allow you to pay for full access to the vehicles and in short, temporary ownership- however only for the agreed length of time on the contract. Finance leasing is very common for businesses that use a number of vehicles. Another example of when a finance lease would be suitable is a gym requiring equipment. The gym and the gym-goers have full access and use of the equipment without liability at the end of the contract. When the contract ends the agreement automatically rolls onto a secondary rental period. This is one annual payment that is equal to one rental payment in the primary agreement. Additionally, the asset can be sold on to a third party by the lessee, who is acting on behalf of the lessor. Another option is that the item is returned to the lessor. Finally, there is an option to extend the contract if you, the lessee wishes to.
Why should I choose a finance lease?
If you are in need of vehicles or equipment to advance your business, then you could consider finance leasing. If you cannot afford big initial payments or would benefit from lower monthly costs, then finance leasing could be for you. A finance lease is a good option for companies who are not in a position to purchase at the moment but perhaps in the future will want to. This financing option will give your business a long term lease plan and therefore more time to consider making further investments. Companies in Scotland will also find numerous tax benefits to choose finance leasing which our expert brokers can walk through with you.
Parkins Finance understands each business is individual so our knowledgeable staff will advise you on whether finance leasing is the best financial decision for you or your business.