A less commonly used way to fund asset purchases is by Finance Lease. This looks and feels a lot like a Hire Purchase agreement, however as it is a form of lease, ownership of the asset is not taken.
The business takes on the responsibility of the asset – the risks and rewards of ownership, such as the fluctuations in value and the repair/maintenance costs – but the asset is never formally owned.
The lease agreement (also known as the primary rental period) consists of equal monthly payments which in total add up to the full cost of the asset, plus interest.
There is usually no deposit required and the VAT element is spread out over the term of the lease.
At the end of the agreement (known as the primary period) a business typically has 3 options:
As the lease agreement is aligned to the assets predicted useful life, terms can usually go for longer when compared to Hire Purchase agreements.
Qualifying assets for Finance Leases are usually:
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