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A business finance lease is a type of lease which companies use to rent equipment from the legal owner (lessor) of the asset. The customer (lessee) rents the asset for most of the item's useful life and has operational control.
Leasing is a way for a business to access the funds required to purchase an asset. The exact finance lease meaning, as defined within the Statement of Standard Accounting Practice is:
“A lease which transfers all of the risks and rewards of ownership of an asset to the lessee.”
The 'lessor' is the leasing company, with the term 'lessee' referring to the business which is using the asset. In most situations the business finance lease will be set for a period of between 1 and 5 years. Although, there will be the option to renew at the end of the contract agreement.
When it comes to searching for asset finance, there are a number of options available for your business. Here we explain what finance lease offers and what you can use it for. Finance lease, also known as 'leasing', is a way of providing finance against an asset. The owner (lessor) of the goods, usually purchases the asset for the user (lessee) to rent from them over a contractually agreed period.
The range for a finance lease is normally between one to five years and is designed to last until the equipment expires - although you can renew and continue to 'lease' it. With finance lease, the owner of the asset is retained by the lessor, whilst the lessee has exclusive use of the asset as per the terms of the finance lease.
In most situations the lessee will make repayments over a set period of time, to cover the cost of purchasing the asset. It is also common for there to be an optional balloon payment at the end of the contract. Once the lease period ends, there are a variety of possible options. So, it is important to compare finance lease agreements. These include:
The lessee sells the asset on behalf of the business finance lease provider.
The asset is returned to the finance provider.
A new secondary lease finance period begins.
If the asset is sold, the lessee may be provided with the majority of the proceeds from the sale. Although, if the lessee would like to retain use of the asset, they can also enter into a new lease finance agreement. In this situation the secondary lease could cost a lot less, which is known as a peppercorn rental. When you compare lease agreements these terms will be clearly set out.
One of the most common examples would be a finance lease car, although some businesses also choose van finance lease agreements. A business finance lease lending agreement can be used for anything from purchasing furniture to new tools.
A contractual agreement is signed beforehand, which sets out the terms of the finance lease. During the term of the finance lease, the user will pay a monthly rental to the asset finance company to cover the original cost of the goods.
Under the terms of the agreement, you are obliged to pay all of the rentals up to the end of the contract. A finance lease is usually a non-cancellable agreement, although it may be possible to terminate early. Finance leasing provides flexibility and freedom - you don't have responsibility for something that you do not own, although due care is essential.
A finance lease is a commercial arrangement between the legal owner (lessor) and the user (lessee) whereby the following occurs:
The lessee (borrower or customer) chooses the asset required (machinery, equipment, software, vehicles)
The lessee uses the asset during the agreed lease period
The lessor recovers a large part or almost the complete cost of the asset in addition to earning interest from the rentals paid by the lessee
The lessor (finance company) purchases the asset
The lessee has the option to acquire the asset at the end of the agreement
Whether you are just starting or have been trading for years, there could be a time when you need a competitive business lease. We know that it can be confusing to compare finance lease options, especially when there are so many variations available. To help you find an ideal lease, this guide will take you through the difference between a finance and operating leases.
The main difference between lease and finance lease alternatives is that the risks and rewards of ownership are not completely transferred. In most situations, the operating lease will run for a shorter amount of time than the economic life of the asset.
This means that there is a resale value when the lease agreement comes to an end. In some situations, the leasing company will re-hire the asset, but they may sell it to recoup some of the residual value. Although, there is a risk that the asset may not retain its estimated residual value when the agreement ends.
The most common types of assets which are purchased using operating leases are tractors, machinery and vehicles. Although, finance lease vans are not uncommon, more companies choose an operating lease for vans and commercial vehicles. This is commonly referred to as contract hire and is a popular way of funding a company vehicle fleet.
When completing an operating and finance lease comparison, the first thing to consider should be what type of asset your business needs. Secondly, consider the required lifespan of the asset and lastly, how long it will be included in business accounts. By understanding your individual requirements, you will be able to compare the advantages of finance lease and operating lease options.
The main thing both types of leases have in common is that they provide businesses with the ability to purchase expensive assets. When you compare finance lease options and operating leases through our website, you will see that they have many similar benefits. For example:
They are fast and easy to arrange.
Businesses can access modern, high specification equipment.
The risk to the business is reduced.
There is less responsibility for maintaining the asset.
It is easy to upgrade the asset.
The main difference between finance lease and operating lease agreements, is that with an operating lease the payments do not cover the full cost. So, if the asset has a relatively short lifespan and will quickly need replacing, an operating lease may be more suitable. This is because the short agreement means the lessor will benefit from its residual value and offer lower rental payments. In comparison, if your business has plans to renew the rental period, a business lease is likely to be more cost effective.
There are also some differences when you compare finance lease agreements, in terms of their impact on balance sheets. Although it is under review, an operating lease is currently not included within balance sheets.
The business finance lease repayments will usually be offset against the businesses taxable profit. This means in many situations there can be favourable finance lease accounting treatment. In addition, if a business is VAT registered, the company can claim back VAT on finance lease rental payments.
There are also ways to reduce the financial burden on the business, such as including maintenance costs within repayment plans. This will ensure that the business does not have to pay for unexpected faults or downtime, while improving lease balance sheet figures.
The lessee must divide the lease liabilities between the non-current liabilities and the current liabilities to calculate figures. At the end of the accounting period, there will be both current and non-current liability amounts related to the businesses lease obligations. The lease obligation will include the outstanding capital balance and any accrued interest.
The best way to compare finance lease impacts is to put together an accurate finance lease accounting example. This can be used to predict the financial impact on the business. Alternatively, a quick way to assess the affordability of an agreement is to use a finance lease calculator.
At the end of your finance lease there are a number of possible options. The details will be set out in your agreement, however, you can expect one of the following to occur:
You sell the asset to a third party, acting on behalf of the owner.
You return the asset to the finance lease company.
You extend the finance lease and keep the asset under a new agreement.
Here at BusinessComparison we work with more than 30 lenders, which specialise in providing competitive business lease options. Our specialist business finance lease team will get to know your business and negotiate the best deals on your behalf. Depending on your lease criteria, you could have access to funds in as little as 48 hours, with rates starting from just 3%.
If you are interested in business finance options, our experienced team can help you compare lease options today. To discuss the differences between business finance options or to arrange competitive finance, please contact our dedicated team today.