How does a Finance Lease Work?

Under a Finance Lease Agreement, the financier purchases the equipment on behalf of the client and then the customer rents the equipment back from the financier over a specific term. Ownership of the equipment is transferred to the customer once the residual payment has been finalised.

Features of a Finance Lease Facility

  • term of a lease can range from 12 months to 84 months
  • fixed interest rate applies
  • ownership of the asset is transferred to the client when the final payment or residual payment has been made by the customer
  • payments can be made weekly, monthly, quarterly, yearly or structured (i.e. agreed payments over different times of the year)
  • residual payment at the end of the term is applied to the loan
  • 100% of the cost of the asset is financed
  • full payment is claimed as a tax deduction reducing tax paid to the ATO
  • financier claims the full gst on the purchase price as an input tax credit as opposed to the customer
  • client pays the gst on the monthly payments and the residual
  • residual amounts and term of the Finance Lease facility are governed by ATO guidelines
  • asset risk lies with the customer at the end of the term as they are responsible in paying out the residual payment

Benefits of a Finance Lease Facility

  • financing machinery using a Finance Lease facility as opposed to using own funds, will preserve cash flow to maximise working capital position
  • flexible payment options allow clients to make payments suitable to their cash flow
  • fixed payments allow businesses to accurately project income and expenses going forward
  • Finance Leases for heavy equipment can be assessed on either a full doc or low doc basis
  • as these types of loans use the equipment as security, it allows clients to free up property equity to pursue other investment opportunities
  • residual payment applied to the loan so as to reduce monthly payments paid by the customer over the term of the loan
  • residual can be paid out in full by the customer at the end of the term
    the residual can also be refinanced into another loan at the end of the term
  • residual could be paid out by the dealer when client goes to upgrade to a newer machine
  • 100% of the monthly payment is claimed as a deduction on clients profit and loss statement
  • Finance Leases are treated as off balance sheet lending which improves the balance sheet position of the business

Example of a Finance Lease Facility used for Excavator Finance

  • Purchase Price of new Caterpillar Excavator – $380,000 (gst inc)
  • Finance Type – Finance Lease
  • Loan Amount – $345,454.55 (client borrows the ex gst amount)
  • Term – 60 months
  • Residual – 40% or $167,200 (gst inc)
  • Payments – monthly in advance

Outcome

  • Client could claim the full monthly payment as a tax deduction on their profit and loss – minimising tax paid to the ATO
  • The 40% residual payment reduced payments on the loan over the 5 year period allowing client to maximise cash flow for ongoing projects (payments are only calculated on $345,454.55 less the residual amount of $167,200)
  • Fixed interest rate allowed client to easily budget for ongoing expenses
  • The Finance Lease is treated as off balance sheet allowing them to increase their borrowing capacity going forward as this liability does not appear on their balance sheet

Who would use a Finance Lease Facility?

A Finance Lease Facility is a form of financing heavy equipment or heavy vehicles in Australia, for businesses looking to improve the position of their balance sheet through removing liabilities from the balance sheet.

Heavy Vehicle Finance advises that all clients need to discuss a particular funding scenario with their Accountant before making a decision on what product to use when financing trucks or any type of heavy equipment. The Accountant will be able to discuss what the implications of a Finance Lease will be for their business to ensure they receive the most relevant information based on their own financial structure.

To ask more questions about a Finance Lease Facility

To discuss how a Commercial Hire Purchase facility works in further detail, please call one of our Finance Consultants on 1300 788 740. One of our specialists Finance Consultants will be able to suggest the best product relating to your particular funding scenario. Or alternatively you could also fast track the process by completing our online finance pre-approval form.

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