finance leases are a popular way for businesses to acquire equipment or machinery without making a large upfront investment. Unlike operating leases, finance leases involve the lessee taking ownership of the asset at the end of the lease term. In this article, we’ll discuss the benefits of finance leases and how they can be useful for businesses.
What Are Finance Leases
Before we get started on the benefits of finance leases in business, let’s quickly look at what finance leases actually are. In the USA, the terminology has changed recently. Capital leases are made up of contracts that entitle the user to temporarily use the asset. Capital leases are now known as finance leases but some people still call them capital leases incorrectly. A finance lease is essentially the same, it’s a way of providing finance. The leasing company (lessor) who owns the asset will then rent the asset to the business owner (lessee) for a set amount, and a duration determined by the contract.
No upfront capital expenditure
One of the most significant advantages of finance leases is that they do not require the lessee to make an upfront payment for the equipment or machinery. Instead, the lessee makes monthly payments over the lease term, which can help businesses preserve cash flow and maintain working capital.
Fixed monthly payments
Finance leases typically involve fixed monthly payments, which makes it easier for businesses to budget and plan their expenses. This can be particularly helpful for businesses that are trying to manage their cash flow or have seasonal fluctuations in revenue.
Finance leases can provide tax benefits for businesses. The monthly lease payments may be tax-deductible, and the lessee can claim depreciation on the asset, which can reduce their taxable income. The trick is in getting this right consistently. It isn’t easy which is why a lot of people speak to accountants or use the correct lease accounting software to proper get the tax benefit right on their lease.
Finance leases can be structured to meet the specific needs of a business. The lease term can be tailored to the expected life of the equipment, and the monthly payments can be adjusted based on the lessee’s budget and cash flow requirements. Additionally, the lessee may have the option to purchase the asset at the end of the lease term, often at a predetermined price.
Access to the latest equipment
Leasing equipment through a finance lease can provide businesses with access to the latest technology and equipment. This can be particularly beneficial for businesses that operate in industries where technology is constantly evolving, and they need to stay competitive.
Better risk management
Finance leases can help businesses manage risk by shifting the risks associated with ownership of the asset to the lessor. The lessor takes on the risks of obsolescence, maintenance, and resale value, which can be significant for businesses that operate in industries where equipment can become quickly outdated.
In conclusion, finance leases can be a useful tool for businesses looking to acquire equipment or machinery. They provide several benefits, including no upfront capital expenditure, fixed monthly payments, tax benefits, flexibility, access to the latest equipment, and better risk management. As with any financial decision, it’s essential to carefully evaluate the costs and benefits of finance leases before making a decision.