Finance Lease. 

A Finance Lease is a way of acquiring business assets where the customer “lessee” rents an asset from the owner “lessor”. 

Finance Lease. 

Finance Lease. 

A Finance Lease is a way of acquiring business assets where the customer “lessee” rents an asset from the owner “lessor”. 

Overview 

A Finance Lease is a popular alternative to Hire Purchase for many businesses throughout the UK. 
 
Unlike a Hire Purchase agreement, a Finance Lease doesn’t require the full VAT amount to be paid upfront. 
 
The VAT liability is not on the purchase price, instead it is on the fixed monthly rentals of which a VAT registered business can claim up to 100% back. Please note VAT rules are different for cars. 
 
In addition to being able to claim back up to 100% of the VAT on the monthly rentals, the rental charges can normally be offset against taxable profits. 
Lease Finance Limited is a Broker and not a Lender 

Key Benefits 

Fixed payments ‘rentals’ for the primary period 
Low up front costs 
Claim back up to 100% of the VAT on monthly rentals 
Tax Advantages - rentals can normally be offset against taxable profit 
No excess mileage charges 
While ownership is not an option, the lessee has up to 99% interest in the asset 

What is a Finance Lease? 

A Finance Lease is a way of acquiring business assets where the customer “lessee” rents an asset from the owner “lessor”. The length of time the agreement runs for is split in to two periods. The Primary and Secondary rental periods. 
 
The primary rental period is a fixed term which is agreed at the start, this is normally 3, 4 or 5 years. At the end of the primary rental period, the lessee has 2 options. 
1. The lessee can arrange for the lessor to sell the asset to an independent 3rd party after which the lessor will refund the lessee up to 99% of the sale price, less VAT and any settlement due, by way of rebate of rentals. 
 
2. The lessee can continue to lease the asset in the secondary rental period for an annual peppercorn rental, which can be as low as £100 + VAT per year. 
 
Different lenders offer different end of lease terms, but these will be explained the lessee prior to entering into any agreement. While the lessee will not own the asset outright, they have up to a 99% interest in it. Therefore, should they decide to sell it during the primary rental period, they will receive up to 99% of the sale price, less VAT and any settlement due. 
 
If the sale price is below the settlement due, the lessee will be liable for the shortfall. 

Finance Lease Case Study 

A finance lease is commonly used for acquiring plant, machinery and commercial vehicles. In this finance lease example we will share a recent finance lease deal for a haulage company on contract with a nationwide home builder. 
 
Their contract is to load the earth, stone, concrete, wood and metal, removed from the site in order to dig out footings for the housing project, and transport it to landfill and recycling plants. 
 
‘Muck shifting’ as it is known in the industry is hard on the vehicles, normally 8x4 steel body tippers, and would be unsuitable for contract hire. A minimum initial outlay was required by the customer who wanted to keep as much working capital as possible in his business. Therefore, it was agreed that a finance lease would be the best option. 
 
After agreeing a deal with a supplier of used 8x4 steel body tippers, the customer asked us to fund the purchase. In order to get a facility in place, we contacted the customer by phone to get an overview of their business, including how long they have been trading, details of the directors and their permission to carry out credit searches on all directors and major shareholders. 
 
In addition, we asked them to email 3 months business bank statements, a copy of their recent filed accounts and details of the truck and supplier. 
After reading through the information provided, we identified a lender thought to be most suitable for this deal. It was discussed with the customer and an initial indication of likely monthly rentals was given. 
 
A proposal was written and sent to the chosen lender together with financials and asset details. An acceptance was issued within 24 hours by the lender and we arranged the invoice from the supplying dealer. 
 
We received a copy of the invoice by email which gave us the information we needed to generate the finance lease documents. 
 
Very often our customers spend Monday to Friday out of the office or don’t have an office at all. This was the case on this occasion, so we arranged to meet the customer on site to sign the documents. 
 
Once the documents were signed, they were sent via email to the lender with a copy of the invoice and any other information they requested on the acceptance. In this case it was just a photograph of the directors driving licence. 
 
The paperwork was processed by the lender and the supplier was paid out the same day. 
 
The customer then contacted the dealer to arrange collection of his new (used) 8x4 steel body tipper. 

Finance Lease vs Hire Purchase? 

The choice between Finance Lease or Hire Purchase for most limited companies, partnerships and sole traders is normally dependent on financials and accounting. 
 
With Finance Lease the VAT is on the the monthly payments over the duration of the agreement. However, Hire Purchase normally requires the full VAT amount to be paid upfront. That said, there are now options to defer the VAT payment - more information about deferring the VAT on hire purchase can be found by visiting the hire purchase page. 
 
Finance lease rentals show as an operating cost which can be offset against taxable profit. The asset may not appear on your balance sheet. Whereas an asset subject to a hire purchase agreement will show on a company balance sheet. 
 
This only applies to finance lease UK. We do not provide services outside of the UK. 
 
Hire Purchase  
Finance Lease 
Will I own the asset? 
Yes, once the option to purchase fee is paid, title of the asset transfers to the borrower 
No. However you can continue to lease the asset for an annual "peppercorn" rental. You will also have up to 99% interest in the asset. 
What initial payment is required? 
All the VAT + a percentage of the purchase price. 
Normally a 10% + VAT on the 10% is required. But this can vary, depending on the deal. 
What term can the agreement be taken over? 
Anything between 2 and 7 years, depending on the terms set our by the lenders. 
Up to 5 years for the primary rental period. The secondary rental period can extend to the life of the asset. 
Will my payments change? 
No, the payment is fixed for the duration of the agreement. 
No, the payment is fixed for the duration of the agreement. 
What happens at the end of the agreed term? 
After the option to purchase fee has been paid, title of the asset transfers to the borrower who then owns the asset. 
The asset can be sold in which case the lessor will raise the sales invoice and on receipt of cleared funds will refund up to 99% less VAT and any settlement. Or, the asset can run into the secondary rental period for an annual "peppercorn" rental 

Frequently asked questions regarding Finance Lease 

Q - Will I own the asset at the end of the primary period? 
A - No, title of the asset remains with the lessor. However, the lessee will have up to 99% interest in it. 
Q - What will I have to pay upfront? 
A - This depends on the asset. Generally 10% +VAT but it can be as little as one monthly payment up front. 
Q - How long is the agreement for? 
A - The primary rental period can be anything from 2 to 5 years. The secondary rental period is ongoing until you decide to sell the asset. In which case, the lessor will raise the sales invoice and refund you up to 99% of the sale price, less VAT and any settlement. 
 
 

If you would like to discuss Finance Lease, call Lease Finance Limited on 01939 291323 or contact us by email. 

Lease Finance Limited is a Broker and not a Lender 
 
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