Finance leasing

If you need to make a purchase, but don’t want to risk cash flow, there are dozens of financing options available to you. Financing effectively means funding, and this can come from a high street bank, or the many new alternative funding options. When it comes to financing, a lender will give you the money you need to buy assets or grow your business. However, leasing is different. With leasing the asset isn’t yours during the leasing agreement. You can use it as if it was yours, but you are not the legal owner of the asset until the end of the contract, and when all outstanding payments have been made to the leasing company.

The great thing about finance leasing is that you have full use of an asset, let’s say a tractor, but it stays off your balance sheet. For a standard finance lease, making lease repayments is both an investment in the asset, and an interest expense. The interest element is written off over the duration of the contract, i.e the primary lease period. Thus, for the appropriate accounting treatment, it is necessary to apportion rents between the following two elements.

The rental payable should be split into two elements:

• The capital element repaying the loan (reducing the liability in the balance sheet)

• The finance charge or interest element (which is debited to your profit and loss account).

The finance lease will therefore be reflected in your profit and loss account through a depreciation charge and a finance charge.

The process begins when a business selects an asset it needs, such as machinery, vehicles, or equipment. The leasing company purchases the asset and leases it to the business under a fixed-term agreement. The lessee makes regular payments over the lease period, which helps with budgeting and cash flow management.

During the lease, the business has full use of the asset, even though legal ownership remains with the lessor. At the end of the lease term, the lessee may choose to buy the asset, return it, or negotiate a secondary rental agreement.

While both finance leases and hire purchase agreements allow businesses to use assets without immediate full payment, they have key differences:

• Ownership:

  In a hire purchase agreement, ownership automatically transfers to the lessee after the final payment. In a finance lease, ownership does not automatically transfer and depends on the lease terms.

• Balance sheet treatment:

  Both finance leases and hire purchase agreements result in the asset and liability being recorded on the lessee's balance sheet, but accounting treatment may vary based on jurisdiction.

• Tax implications:

  Tax treatment for lease payments and depreciation may differ between finance leases and hire purchase agreements. Consulting a tax advisor is recommended to understand the specific benefits and obligations.

Yes, in most cases, the lessee is responsible for insuring the leased asset throughout the lease term. the lease agreement usually specifies the required level of insurance coverage to protect against damage, theft, or loss. Failing to maintain insurance may result in penalties or additional costs.

Some finance lease agreements allow for lease transfer (also known as lease assignment), but it usually requires approval from the lessor. transferring a lease may involve additional fees and a credit check for the new lessee. businesses considering a lease transfer should review the contract terms and discuss options with the leasing company.

Finance leases are widely used across various industries, including:

• transport and logistics

  – businesses lease commercial vehicles, trucks, and fleets.

• construction and manufacturing

  – companies lease heavy machinery, industrial equipment, and tools.

• technology and it

  – organisations lease servers, networking equipment, and office technology.

• healthcare

  – hospitals and clinics lease medical equipment and diagnostic machines.

This leasing model helps businesses in asset-heavy industries access essential equipment while preserving cash flow.

For tax purposes, finance leases are typically treated as asset purchases, meaning the lessee can claim depreciation and interest expenses. in contrast, operating leases are considered rental expenses, where lease payments are fully deductible. Tax treatment varies based on jurisdiction, so consulting a tax professional is recommended.

Terminating a finance lease before its scheduled end date can be challenging and may involve significant penalties or fees. The specific terms for early termination are outlined in the lease agreement. Businesses should carefully review these terms and consider the financial impact before deciding to terminate a finance lease early.

Most finance lease agreements have fixed payments, meaning inflation does not directly affect the monthly cost. However, if a lease agreement includes variable interest rates or annual price adjustments, inflation could lead to increased payments. Businesses should review lease terms to understand how inflation may impact costs over time.