Finance lease is a method of funding equipment
over a set term. However, ownership of the equipment remains with the finance company who can sometimes claim the capital
allowances on the asset. This benefit can be passed onto the customer in the form of a competitive repayment.
Repayments are based on the full capital cost plus interest. At the end of
the term, customers can either sell the equipment and receive a substantial percentage of the sales proceeds or retain use
of the equipment by paying a nominal annual payment referred to as ‘secondary’ or ‘peppercornrental rental.’
Features of this approach are:
- The customer is able to use latest equipment without having to own it.
- The equipment is still shown on balance sheet with the payments shown as a liability.
- The
finance company claims the ‘writing down’ allowances and pays the full VAT on the equipment.
- Repayments are subject to VAT which can be reclaimed.
- The equipment can either be sold
at the end of the finance term or a nominal annual payment is made to retain use of the equipment.
The benefits of this approach are:
- The finance company pays the VAT on equipment cost which can benefit the
customer's cashflow.
- Negotiable initial outlay enables the customer to preserve working
capital.
- Customers receive a substantial percentage of the sale proceeds.
- Payments can be structured around the customer's cashflow or seasonality of their business.
- Finance lease is not payable on demand provided payments are made in accordance with the terms of agreement.
