The customer selects the supplier of the asset and negotiates directly the specification and the price.
An initial deposit or advance rentals are paid leaving the balance, plus interest, to be spread over an agreed term, typically 1-5 years.
The finance company pays the supplier and leases the asset to the customer under the terms of the finance lease agreement.
VAT is payable on the deposit as well as each rental and can be claimed back within the VAT period.
The customer is not entitled to become the owner of the asset at any time but is entitled to sell the asset at the end of the lease and keep between 95-99% of the proceeds. The customer can however continue leasing the equipment by entering a secondary period with annual rentals.
On all finance lease agreements the equipment is shown on the balance sheet as a fixed asset. The finance company can claim capital allowances and pass this benefit onto the customer.
The benefits of a finance lease are:
- The initial VAT payment is lower than that of hire purchase or a cash purchase
- Existing bank credit lines are not tied up
- Rentals can be monthly, quarterly, semi-annual, annual or seasonal
- Fixed rentals for accurate budgets.
Finance Lease is normally suitable only for businesses.