A finance lease, also known as a capital lease, is a form of business finance for equipment. Essentially, a borrower rents an asset from a finance company but usually for most of the assets useful life. As the asset tends to be equipment, ‘useful life’ refers to the time it lasts for, as the likes of heavy machinery doesn’t necessarily last forever.
Finance Lease At A Glance
- The borrower will select an asset
- The finance company will purchase that asset
- The borrower will be able to use that asset during the lease and they will pay a series of instalments for the use of that asset.
- The finance company will recover a large part or all of the cost of the asset plus interest from the instalments paid by the borrower.
Finance Lease Explained
During a finance lease, there is a primary rental period, which tends to last for the duration of the assets ‘useful life’. During this period, the borrower will pay the monthly instalments that entitle them to use the asset and have full responsibility for it. The money that is paid by the borrower will add up to the cost of the asset, including any interest that is accrued.
What Happens At The End of A Finance Lease?
The options you have at the end of a finance lease will vary depending on your finance provider. Once the primary rental period is over, you can continue to use the asset during what is known as a secondary rental period, should you wish. During the secondary rental period, monthly repayments tend to be lower. Depending on your finance provider, you could also sell the asset on behalf of the finance company and be given a rebate of rentals, or return it back to the finance company.
How A Finance Lease Works At Century
The new asset is purchased by us and rented to you over an agreed period. You pay a small initial fee and a fixed monthly rental that we’ll have already agreed with you based on your cash flow needs.
At the end of the lease, the asset returns to us, but you receive a portion of the resale value. This is especially useful for any equipment that is regularly replaced by an upgraded model.
One of the main factors that are attributed to a finance lease is that you will essentially feel like you own the asset, even though you don’t. By this, we mean that you adopt all of the risks and rewards of ownership.
Finance Lease Vs Hire Purchase
You may have likened a finance lease to hire purchase and you wouldn’t be wrong in thinking this, the nature of paying instalments for the use of something, while not actually owning it is very similar. However, they do differ in some respects, particularly when it comes to the finance side of things.
One thing to note is that with a finance lease, you pay the instalments for the duration of the assets useful life and you essentially rent the asset from a finance company. Whereas with hire purchase, you essentially buy the asset in instalments, with the option at the end to fully own it.
You also tend to pay the entire amount of VAT upfront with hire purchase, whereas with a finance lease, you spread the VAT cost out and pay it as part of the monthly instalments.
One of the most notable differences with hire purchase is that you have the option to own the asset at the end of the loan period (not during it), whereas with a finance lease, the asset is owned by the finance company and you essentially own it.
Get in touch with Century Business Finance
At Century, we like to help businesses who are looking to grow and with our finance lease service, you can do just that. Get in touch with us today and speak to one of our experts, if you want to go ahead, you will know whether you’ve been accepted for a finance lease within 24 hours.