6 min read
Finance lease is a widely used alternative to outright purchase, giving a business full use of an asset without necessarily taking on ownership at the end of the agreement.
What it is
The finance company buys the asset and leases it to the business for a primary period covering most of its useful economic life. The business pays rentals throughout, and in substance carries the risks and rewards of using the asset, even though legal title stays with the finance company.
At the end of the primary term there are usually options to continue using the asset for a nominal secondary rental, or to sell it on the finance company's behalf, with the business typically receiving the majority of any sale proceeds.
Who it suits
- Businesses that want full use of an asset without tying up capital in ownership
- Companies that would rather rentals were spread across the VAT payment schedule, easing cash flow
- Operations replacing equipment on a fairly predictable cycle
- Businesses whose accountant advises that lease rentals suit their tax position better than ownership
How it works
Rentals are calculated to recover the cost of the asset, plus interest, over the primary term. VAT is charged on each rental rather than upfront, which can ease cash flow compared with hire purchase.
- An initial rental, often equivalent to one or more monthly payments, may be requested
- Regular rentals are paid over the primary term
- At the end, the business can usually continue at a lower secondary rental or arrange a sale
- The asset does not automatically become the business's property
Typical terms
| Term | Typical range |
|---|---|
| Term length | 24 to 84 months depending on the asset |
| Deposit | Often one to three rentals in advance |
| Payment frequency | Monthly, quarterly or seasonal |
| End of agreement | Peppercorn secondary rental or sale of the asset, proceeds largely passed to the business |
| Security | The asset itself |
Pros and trade-offs
Where it works well
- VAT spread across rentals rather than paid in full upfront
- Keeps capital free for working capital or other investment
- Can suit businesses that expect to renew or upgrade the asset
- Rentals may be treated as an allowable expense, subject to accountant confirmation
Trade-offs to weigh
- The business does not automatically own the asset at the end
- Ongoing rental commitment for the primary term
- Sale proceeds at the end are not guaranteed and depend on the asset's condition and market
Worked example
Worked example: mobile crusher lease
- Asset cost
- £145,000 plus VAT
- Initial rental
- Equivalent to one monthly payment
- Term
- 60 months
- Indicative monthly rental
- Approximately £2,450 plus VAT
- End of term
- Option to continue at a nominal rental, or arrange a sale
These figures are illustrative only and are not a quotation. Actual rentals depend on the asset, term and status of the business.
If a finance lease suits how you plan to use and eventually replace an asset, get in touch and we can talk through the structure and provide an indicative quotation.
Next step
Talk through the numbers with us
Send us the details of the asset and we will come back with an indicative figure and a properly structured option from the funder panel. No obligation, and no pressure to proceed.