Introduction to Finance Lease
A Finance Lease is when a customer (the lessee) agrees to rent a particular piece of equipment over a set term with a predetermined residual value fixed to the goods.
Key features of a Finance Lease
A longer term lease is available to finance the purchase of equipment, the lessee can keep the goods for a long time or the life of the product. This is the type of lease you would use to purchase industrial equipment and other fixtures for business purposes.
Monthly payments with an extended term give the customer greater ease and more freedom with cash flow and repayments.
Finance leases usually do not include maintenance and repair costs. They can be paid out early with any costs worn by the leasee.
The lessee wears the residual risk in a finance lease. If the asset sells for less than its residual value, the business must make up the shortfall.
Finance Lease Benefits
There is an agreed residual value set before the commencement of the lease.
The Lessor obtains legal ownership of the item to be leased, by paying the supplier/vendor's invoice. The Lessee then uses the goods and pays rent for the term of the lease contract.
During the term of the lease agreement, the Lessee pays rent and does not obtain ownership/equity over the leased item.
Under a finance lease agreement, the Lessee is responsible for all maintenance, running costs, insurance and fees for the leased item.