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How the finance lease powers the modern business

What is a finance lease?

A finance lease is a type of asset finance that businesses use to access equipment and other assets.

If you don’t have the funds to buy equipment your business needs upfront, or you want to retain as much working capital within your business as possible, then a finance lease could provide the solution.

What is a finance lease?

A finance lease is a type of asset financing, where equipment is leased over an agreed amount of time, usually based on a full pay-out agreement. This means that the total sum of the rentals covers the full cost of the equipment, as well as interest.

This allows the business to split the payments over the term of the lease, avoiding a large upfront outgoing. This type of finance also provides flexibility at the end of the lease agreement.

With a finance lease, the provider owns the equipment and hires it out to the business. However, the business takes on the risks of ownership for the duration of the lease, such as maintenance costs.

How does a finance lease work?

With a finance lease, the leaser buys the asset your business needs, and you get access to it straight away.

You’ll have access to the asset over an agreed lease term, during which you’ll make fixed monthly payments that cover the full cost of the asset, plus interest.

With a finance lease, the leasing provider owns the equipment and hires it out to the business. However, the business takes on the risks of ownership, such as maintenance costs.

The initial lease term usually covers at least 75% of the time the asset is expected to be used for, known as its useful lifespan. During this period, it shouldn’t need repairing or replacing, although as mentioned above, you will be responsible for any maintenance that is required.

Once the initial lease period comes to an end, the business will have the flexibility to choose what happens next. This usually involves extending the lease and continuing to use the asset, returning the asset to the lease provider, or making a final payment to own the equipment outright.

What are the benefits of a finance lease?

Finance leasing offers a number of benefits, including:

  • Access the equipment you need with a minimal upfront cost
  • Payments are spread over the term of the lease
  • Fixed monthly payments improve budgeting, cash flow and financial forecasting
  • Flexibility at the end of the contract
  • Scalability
  • Tax savings – finance lease payments are usually tax-deductible as a business expense.

What are the disadvantages of a finance lease?

Of course, as with any type of asset finance, if you’re considering finance leasing, it’s important you’re aware of any potential downsides, including:

  • During the term of the lease, you’ll be responsible for all maintenance and repair costs
  • You must be a VAT-registered company to access equipment via a finance lease
  • You won’t own the equipment but will be responsible for maintenance and repairs
  • You will pay more over the length of the lease than if you were to buy the asset outright

What equipment can be funded using a finance lease?

Finance leases can be used to fund a range of assets, including:

  • IT equipment, such as printers and computers
  • Health equipment, including PET and CT scanners, and dialysis machines
  • Manufacturing and industrial equipment
  • Company vehicles

What happens at the end of the finance lease?

One of the benefits of a finance lease is that the business has a degree of flexibility at the end of the term. They can typically choose to:

  • Return the equipment and upgrade to the latest technology
  • Extend the lease term and continue to use the equipment
  • Keep the equipment and own it outright

Is a finance lease the same as a hire purchase?

Hire purchase is another type of asset finance. Although hire purchase has similarities to a finance lease, with this type of financing, you buy the asset you need and pay for it in instalments. When the agreed term comes to an end, you’ll own the asset.

The key differences between hire purchase and finance leasing are:

  • With hire purchase, you usually have to pay the full amount of VAT upfront, whereas, with a finance lease, the VAT is spread over the monthly payments
  • With hire purchase, the asset shows on the balance sheet. With a finance lease, on the other hand, the asset is shown as an operating cost, with rentals offset against profit
  • At the end of a hire purchase term, you’ll own the asset, whereas a finance lease gives you the flexibility to choose to return or upgrade the equipment or extend the lease

Is a finance lease suitable for my business?

A finance lease is one of many different asset financing solutions. The best type of lease for your business will depend on a number of factors, including the type of assets involved, whether you want to own the asset outright, your long term plans, and your financial situation.

How we fit in

At CHG-MERIDIAN, we offer various asset financing solutions, including finance leases for life long assets such as IT and medical equipment. To find out more about our equipment leasing services, please get in touch.

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We'd love to hear from you, feel free to contact us with any questions.

Simon Young

Vice President Sales UK/Ireland

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