Finance Leases Explained - Lease Today, Own Tomorrow

A finance lease is a business leasing agreement where a business is given access to an asset and has the option to buy it once the rental period ends. Every finance lease has a lessor who owns the asset and provides it to the lessee, the business using the asset.

Finance leases create a rental relationship where the lessee makes regular payments to the lessor and is sometimes responsible for maintaining the asset and keeping up with insurance. They are often used in industries that require equipment, vehicles, and general machinery. From cranes to bike finance, they allow business owners to use and eventually own an asset.

A finance lease can be an invaluable option for a business ready to grow or needing extra support. Some of the advantages a finance lease provides are:

A finance lease lets you quickly acquire new assets or equipment to support and improve your business operations. Additionally, purchasing these items outright can be costly, and saving enough money might not be feasible. In some cases, the time spent gathering funds and organising finances for the purchase could put your business at a competitive disadvantage or even risk operational disruption in the long term.

An experienced finance company in New Zealand can assist in finding a lender and streamlining the finance lease process, ensuring a quick turnaround.

In any given industry, owning the assets required to run the business may be preferable to hiring them each time. Ownership gives you full control over an asset so that it is always accessible and in the condition you need it to be – that’s one less thing to worry about. The process of hiring equipment also adds extra work for a business and could slow you down over time.

Finance leases enable ownership as a long-term goal without the level of initial financial commitment necessary to purchase an asset outright. In the event you decide not to purchase the asset, finance leases still represent a more manageable investment that can be made to enhance your business.

Finance leases can positively impact your balance sheets and influence your accounting to benefit your business. Rental payments are considered business expenses, meaning they’re tax-deductible. In tougher economic times, finding financial relief where possible is important.

Additionally, regular payments make budgeting easier, helping you manage your cash flow more effectively.

Finance leases are one of several options available for a business when organising procurement. Another option businesses have are operating leases. This method follows a similar payment structure to finance leases, where rental payments are made over a fixed amount of time. Although both methods will give you access to the assets you need to run your business, there are some differences to consider before committing to one over another.

Note: Under past accounting standards in New Zealand, operating leases were considered ‘off-balance’ items. Under the current NZ IFRS 16, operating leases should be included on the balance sheet.

Unlike finance leases, operating leases do not offer the option for the lessee to buy the asset from the lessor. The path to asset ownership is a key component of finance leases, which operating leases are not designed for. Although both agreements function similarly, their long-term value varies as they serve a different business intent and purpose.

Finance leases tend to have longer terms than operating leases, reflecting the intent to own the asset and its expected economic life eventually. Assets acquired through an operating lease are expected to have a shorter economic life in comparison.