How Do Finance Leases 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.
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Features of a Finance Lease Facility
Benefits of a Finance Lease Facility
Example of a Finance Lease Facility
- Purchase Price of second hand truck for new start business – $110,000 (gst inc)
- Finance Type – Finance Lease
- Loan Amount – $110,000 (client could borrow full amount with no deposit)
- Term – 60 months
- Residual – 30% or $33,000 (gst inc)
- Payments – monthly in advance
Outcome
- Client did not have to put in a deposit which meant they could use their own funds to cover short-term business expenses
- Client could claim the full monthly payment as a tax deduction on their profit and loss – minimising tax paid to the ATO
- The 30% 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 $110,000 less the residual amount of $33,000)
- 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?
New start businesses with no scope for contributing an upfront deposit, or existing businesses experiencing a high level of growth.
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.