Finance Leases UK

Most of us are familiar with the concept of leasing in our personal lives, especially when it comes to bigger-ticket items such as cars.

But finance leases, also known as asset finance, are equally common in the world of business, and a vital way for firms to invest in their growth and prosperity, without tying up too much cash flow.

In this guide, we’ll cover everything you need to know about finance leases, including the benefits, risks, mechanics and their uses, and explain how ABC Finance can help your business access the right asset finance it needs to thrive and grow.

What is a finance lease?

A finance lease is a financial contract. It grants the lessee (the business) the right to use the asset for a specified period in return for regular lease payments. Basically, it’s a way to access necessary equipment, without needing to buy it, for an affordable monthly rental charge.

The sorts of assets covered by finance leases are vehicles, plant and machinery, specialist equipment, IT hardware and office equipment. It can also cover certain specialist types of assets, such as medical equipment.

The key difference is that the lessee does not own the asset, at least not during the lease period, which makes this financing distinct from a business loan.

Why do businesses choose finance leases?

Businesses rely on various types of finance to build and grow. It enables them to handle everything from paying suppliers and hiring staff to running marketing campaigns and acquiring cutting-edge equipment for a competitive edge.

Firms also invariably have some degree of capital constraint. Even well-funded businesses will need to maintain a healthy cash cushion for contingency and daily operating purposes, and cash flows need to be very carefully managed.

At the same time, the need to invest in fleet, machinery, equipment and other operating assets never stops, especially when there’s a chance to ramp up production and grow!

So for UK businesses, the challenge is to invest in operating assets without a big upfront payment. Ideally, firms want to spread the cost in a manageable and affordable way that allows them to plan ahead.

For this reason, finance leases are one of the most common forms of asset finance that exist.

What are the benefits of a finance lease?

The benefits of a business lease go beyond freeing up capital. For example:

1. Preserving cash flow, freeing up cash for other business needs such as marketing, stock purchases, payroll and recruitment.
2. Accessing cutting-edge equipment that can give the business a competitive edge (without the heavy upfront cost of purchase.)
3. Fixed budgeting, as payments are fixed across the lease term, making it easier to plan and forecast.
4. Tax efficiency, as lease rentals are usually a business expense deductible for Corporation Tax purposes.
5. Flexibility at the end of the lease, with options that include continuing to use the asset, upgrading to the next model, or sharing in the proceeds of the sale.
6. Easy upgrades to access new tech or fleets without the administration hassle of resale, disposal and purchase cycles.
7. No impact on other lines of credit and borrowing, keeping loan facilities and overdrafts free for other business purposes.

As you can see, a finance lease offers plenty of benefits that can make it particularly appealing to businesses.

How do finance leases work?

As with any type of asset finance, finance leases are contracts which define terms that the lessor and lessee agree to. The lease will define the following:

• The lease term or duration
• The asset being leased and its ownership arrangements
• The payment schedule, which will include an upfront payment and/or deposit, followed by regular rental payments, which may be made monthly or quarterly.
• The residual value of the asset at the end of the contract, with options for a balloon payment/purchase option if applicable.
• Details of who bears the cost and risks, such as maintenance, wear and tear and insurance, for the asset. Typically, the business will take on maintenance.
• Any usage limitations or restrictions. This could be a mileage limit on a fleet car, motivation limits on machinery or hours of operating use, for example. Usually, finance leases are quite relaxed in terms of restrictions.
• Options available to the lessee at the end of the lease – such as purchasing the asset, renewing the lease, upgrading to a newer model under a new contract, or returning the asset as the default option.
• The lender’s depreciation and details around credit risks and re-marketing costs/provisions.

For businesses new to finance leases, it is helpful to use a specialist broker, such as ABC Finance, to navigate the intricacies of this type of asset finance and determine whether it is the best option for your situation.

It’s also very important to read the contractual terms very carefully, to understand what your business is signing up to.

How does a finance lease compare to other forms of asset finance

Other common alternatives to a finance lease are hire purchase or an operating lease (also known as contract hire). They’re both slightly different, however:

Hire purchase

Hire purchase is basically a loan that allows the business to buy an asset. The intention is that the business will ultimately own it at the end of the hire purchase term.

Contract leases

Contract leases are stricter than finance leases, and they don’t offer any option to purchase the asset at the end of the term. However, they do typically include maintenance and insurance for convenience.

So, hire purchase arrangements and operating leases sit at opposite ends of the asset finance spectrum, and finance leases sit somewhere in the middle, as the most flexible option of all.

All forms of asset finance have their pros and cons, and it’s up to the business to decide which one is right for their particular needs at the time.

ABC Finance is here to help clients make the right decision by offering trusted and transparent advice, as well as access to a wide panel of competitive, flexible lenders.