Definition
Under a finance lease, the financier purchases equipment or a vehicle your business picks, then rents it back to you for a fixed period. You make regular payments and usually carry most of the risks and responsibilities of ownership, such as maintenance and insurance. A residual normally falls due on the last day; you can pay it and keep the item, refinance that sum, trade up or hand the item back.
Day to day it feels like ownership, though title stays with the financier for the whole term.
How it works
You choose the asset, the financier buys it and you lease it for a set term, making regular payments. You usually maintain and insure it. At the end, the residual value falls due, and the contract sets out your options.
Finance lease versus operating lease
An operating lease is more like a rental, used for a slice of the asset’s life before it goes back, frequently with maintenance bundled in. A finance lease transfers more of the ownership risks to you and suits assets you may want to keep.
Choosing a structure
Tax and GST treatment differ between leases and loans. Our equipment leasing review and guide to leasing or buying explain the trade-offs. For equipment finance options, make one enquiry.
Common questions
Who owns the asset under a finance lease?
The financier owns it during the lease. Ownership may pass to you if you pay the residual, depending on the contract.
Are finance lease payments tax deductible?
Lease payments for business assets are generally deductible, but treatment depends on circumstances. Check with your accountant.
Sources and further reading