A finance lease is a flexible way for UK businesses to use essential equipment, vehicles, or machinery without the high upfront cost of buying them outright. Instead, you lease the asset over a fixed term, with the option to purchase or upgrade at the end of the agreement.
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A finance lease is a type of asset finance where a business rents an asset from a lender or leasing company for most of its useful life. The lender purchases the asset and leases it to your business for an agreed term. You make regular payments to use the asset—but you don’t own it.
At the end of the lease, you typically have the option to:
extend the lease on a rolling basis
upgrade to a newer model
return the asset
Ownership remains with the lessor, which can have accounting and tax advantages.
fixed term agreement - typically 2 to 5 years
asset use, not ownership - you use the asset as if it were yours
full cost recovery - repay the full asset value plus interest
VAT treatment - often VAT is paid on instalments, not upfront
maintenance flexibility - may include or exclude servicing
Let’s say your company needs a delivery van costing £30,000. A finance lease allows you to lease the van over 4 years with monthly payments of £700. At the end of the term, you can extend the lease, upgrade to a new van, or return it to the lender.
For assets with a long useful life, it's a good option to choose a finance lease. But why not go for an operating lease? In a finance lease agreement, ownership of the asset is transferred to the lessee at the end of the lease term. In contrast, in an operating lease agreement, the ownership of the asset remains during and after the lease term with the leasing company.
Flexible payments are one of the benefits of a finance lease. Lenders will work out payment plans that suit your business and cash flow needs.
There are also flexible end-of-term options. What does that mean? In essence, this means that you can return the asset to the lender for resale, sell it to a third party, or choose to go for a secondary lease period.
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There are many benefits that accrue to a business when using this type of lease to acquire new assets.
Aside from easier cash flow management, a finance lease agreement will suit businesses that don’t want to make big upfront payments to purchase new assets, especially when the business climate is uncertain.
With fixed payments over the duration of the agreement, it’s easier to budget, and avoid unexpected charges.
Business owners can use the asset immediately, with only a small sum payable on the day. In addition, businesses can claim up to 50% of the VAT on cars and 100% of the VAT on commercial vehicles. There are also tax benefits, as VAT is payable on the rentals, and not the purchase price, so payments can be offset against taxable profits.
Usually, there are no penalty charges for additional mileage or damage, and this will be set out in the contract. Despite the fact that you don’t technically own the asset until the end of the finance lease, you still get 98% of the sales proceeds if the asset is sold to a third party at the end of the agreement.
Needs access to high-value equipment
Prefers not to own the asset outright
Wants predictable monthly repayments
Is seeking tax efficiency (lease rentals are often deductible)
May want to upgrade or return the asset after a fixed period
However, it may not be ideal if you plan to retain the asset long-term, in which case hire purchase or asset refinance might be better suited.
Feature | Finance lease | Hire purchase |
Asset ownership | Never (unless sold separately) | Yes (after final payment) |
VAT payment | On monthly rentals | Upfront on total asset |
Flexibility to upgrade | Yes | No |
Off balance sheet? | Sometimes | Usually not |
Common for | Vehicles, machinery | Long-life assets |
Asset type and value: new and high-value items typically qualify
Credit history: good business credit can lead to better rates
Lease term: longer terms reduce monthly cost but increase total cost
Financial documents: lenders may request accounts and bank statements
Supplier relationship: some leasing companies require you to choose from their network
Work with a supplier or select from lender-approved options
We match you with suitable lenders from our network of 120+ providers
Business accounts, bank statements, and asset details
Review repayment terms and decide
Once approved, you can begin using the asset
If you need to make a purchase, but don’t want to risk cash flow, there are dozens of financing options available to you. Financing effectively means funding, and this can come from a high street bank, or the many new alternative funding options. When it comes to financing, a lender will give you the money you need to buy assets or grow your business. However, leasing is different. With leasing the asset isn’t yours during the leasing agreement. You can use it as if it was yours, but you are not the legal owner of the asset until the end of the contract, and when all outstanding payments have been made to the leasing company.
No, the asset remains with the leasing provider unless a separate purchase is arranged.
While both finance leases and hire purchase agreements allow businesses to use assets without immediate full payment, they have key differences:
Ownership:
In a hire purchase agreement, ownership automatically transfers to the lessee after the final payment. In a finance lease, ownership does not automatically transfer and depends on the lease terms.
Balance sheet treatment:
Both finance leases and hire purchase agreements result in the asset and liability being recorded on the lessee's balance sheet, but accounting treatment may vary based on jurisdiction.
Tax implications:
Tax treatment for lease payments and depreciation may differ between finance leases and hire purchase agreements. Consulting a tax advisor is recommended to understand the specific benefits and obligations.
Yes, in most cases, the lessee is responsible for insuring the leased asset throughout the lease term. the lease agreement usually specifies the required level of insurance coverage to protect against damage, theft, or loss. Failing to maintain insurance may result in penalties or additional costs.
Some finance lease agreements allow for lease transfer (also known as lease assignment), but it usually requires approval from the lessor. transferring a lease may involve additional fees and a credit check for the new lessee. businesses considering a lease transfer should review the contract terms and discuss options with the leasing company.
Finance leases are widely used across various industries, including:
transport and logistics
– businesses lease commercial vehicles, trucks, and fleets.
construction and manufacturing
– companies lease heavy machinery, industrial equipment, and tools.
technology and it
– organisations lease servers, networking equipment, and office technology.
healthcare
– hospitals and clinics lease medical equipment and diagnostic machines.
This leasing model helps businesses in asset-heavy industries access essential equipment while preserving cash flow.
For tax purposes, finance leases are typically treated as asset purchases, meaning the lessee can claim depreciation and interest expenses. in contrast, operating leases are considered rental expenses, where lease payments are fully deductible. Tax treatment varies based on jurisdiction, so consulting a tax professional is recommended.
Terminating a finance lease before its scheduled end date can be challenging and may involve significant penalties or fees. The specific terms for early termination are outlined in the lease agreement. Businesses should carefully review these terms and consider the financial impact before deciding to terminate a finance lease early.
When it comes to vehicles, especially for SMEs or personal use, a common dilemma arises: “lease or finance a vehicle?” or “car leasing vs finance.” Here’s how to differentiate:
Leasing a car (operating lease or contract hire)
Lower monthly payments in many cases.
No real ownership responsibilities; simply return the car at lease-end.
Often includes mileage restrictions, and you don’t build equity in the car.
Financing a car (hire purchase or finance lease)
Monthly payments may be higher, but you acquire a form of ownership at lease-end (or partial ownership with a balloon payment).
You take on maintenance, insurance, and other responsibilities.
Potential resale value if you eventually own the car.
Understanding these nuances can help answer queries like “is it better to lease or finance a car?” or “lease or finance difference.” It often depends on whether you want eventual ownership, how much mileage you drive, and if you prefer flexible upgrades.
SMEs often look at “hire purchase or finance lease” to procure business assets such as vans or company cars.
Hire Purchase (HP): You typically pay a deposit, then monthly instalments until you own the asset outright at the end.
Finance Lease: You don’t always gain automatic ownership; you pay rents during the agreement and may have a secondary period at a nominal rent or a final payment to take legal title.
For businesses seeking straightforward ownership, HP can be more direct. For those wanting lower monthly costs and more flexibility, a finance lease can be appealing.
A van finance lease is a popular option if you’re looking to put vans on the road for your business. Instead of paying the full purchase price upfront, you can lease the van and manage your cash flow effectively.
In corporate or SME settings, finance lease accounting is a major topic. Under IFRS and other standards, finance leases are capitalised on the balance sheet, meaning the lease asset and liability both appear, reflecting the near-ownership nature. This can impact your company’s financial ratios.
When deciding whether to lease or finance assets, it is important to consider several factors. First, think about your cash flow: leasing often results in lower monthly payments at the outset, but it may cost more over time, whereas financing can be more expensive each month but will eventually lead to ownership. Also, clarify whether you ultimately need or want to own the asset; leasing may suffice if you only need it for a limited period, but if ownership is desirable, financing might be the better route. From a tax and accounting perspective, note that in many jurisdictions, finance leases appear on the balance sheet, while operating leases may be treated as “off-balance sheet,” although accounting standards have been tightening these distinctions. Finally, if you are considering vehicles, remember that operating leases or contract hires typically involve mileage or usage limits, while finance leases can offer greater flexibility.
Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.
It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.
Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.
Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.