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Why Choose a Finance Lease?

Why choose a Finance Lease?

Equipment can be acquired by outright purchase, using cash or borrowings. Alternatively, there are methods such as leasing or other credit transactions which allow payments to be spread over a period corresponding to your need to use the equipment. The latter approach is often favoured when the equipment itself is income-generating.

Why Choose a Finance Lease?

Finance leasing is an alternative to outright purchase when acquiring major equipment. It offers you, as a lessee, potential cash flow advantages over outright purchase because you may be able to make payments from income generated by the equipment. In addition, lease costs can be set at an economic level by adjusting the price to take account of the value of the equipment at the end of the lease (residual value).

Sometimes, finance leases are used to raise cash as a form of borrowing. For example, an asset may be sold to a financial institution and then leased back to your business by that institution.

From a tax point of view, the key point is to decide whether you or the lessor obtains the benefit of capital allowances which are allowable when certain assets are acquired. It will normally be the lessor however, your lease charges will accordingly be lower as a result of this benefit to the lessor.

One issue to consider from the point of view of your balance sheet is that payments under a finance lease are classed as borrowing. Under an operating lease, where you only pay charges to use the equipment and there is no element of acquiring the asset, payments are classed as trading expenses. You should consider with your accountants how this will affect your tax position.

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