A finance lease is a rental agreement where you use an asset for an agreed period and pay rentals to the lender, who keeps legal ownership throughout. You take on most of the risks and rewards of using the asset, but you never automatically own it. At the end you can usually extend, sell it on the lender’s behalf, or return it.
Because the lender retains title, the initial outlay is often lower than buying outright, and VAT is generally charged on each rental rather than on the full asset price up front. That can help cash flow, though the total amount paid over the term will normally exceed the cash price.
Points to weigh up:
- You are responsible for maintenance, insurance and the asset’s condition unless
the agreement says otherwise.
- You do not own the equipment, so you cannot sell it freely or use it as security
elsewhere.
- Ending early usually triggers a settlement figure covering the outstanding
rentals.
Accounting and tax treatment of finance leases changed in recent years and depends on the reporting standard your business uses — take advice from your accountant rather than assuming. Terms are always subject to lender assessment.