What is a Finance Lease?
A Finance Lease is a mid to long-term agreement whereby the customer (Lessee) leases the equipment for the majority of its useful life and has the option to purchase it at end of the term. Unlike an Operating Lease, a Finance Lease generally carries a residual (or Balloon) option at the end of the term for the Lessee to purchase the equipment at a specific price. Running costs of the asset are not included in the lease and are the responsibility of the Lessee.
What are the benefits of a Finance Lease?
The main advantage of a finance lease is low interest rates in comparison to other types of equipment finance. Your business will have both the use of business equipment and the benefits of ownership, while the lender will have actual ownership of the asset, which means there is very low risk to the lender. Depending on the accounting method used by the business (cash or accrual) you may be able to claim GST as a lump sum at the beginning of the lease (check with your accountant if this is the best option for your business).
What is the difference between a Finance Lease and an Operating Lease?
The main difference between a Finance Lease and an Operating Lease relates to the operating costs of the asset. Under a Finance Lease, the Lessor is responsible for the maintenance and other ancillary expenses, whereas these costs are included in the monthly repayments of an Operating Lease. In addition, at the end of the term, a Finance Lease provides the Lessor with the option to purchase the asset while an Operating Lease does not and the business is required to hand the asset back to the lender