A finance lease is an agreement whereby the lessee has all the benefits of the use of the equipment without the need to own the equipment.
- The term of the agreement is fixed at the outset of the agreement along with the implied rate to the customer.
- The payments can be linear or structured to take into account the customer’s individual cash flow variations.
- VAT is payable on each payment made by the customer.
- At the end of the agreement the customer can return the goods to the lessee or act as the lessor’s agent and sell the goods on their behalf.
- As the lessors agent the customer can be entitled to retain a portion of the sales proceeds by negotiation.
- A finance lease will help to preserve working capital.
- This type of agreement will allow the customer to ‘rent’ the equipment over the useful life of the equipment and not be left with obsolete equipment at the end of the term of the agreement.
- The types of equipment most suited to this type of agreement are generally where the equipment has a relatively short life cycle – 3 to 7 years.
This type of agreement gives all the risks and rewards to the user of the equipment but legal title to the equipment stays with the Lessor. Under this agreement the Lessor will seek to recover the full cost of the equipment along with the interest on the agreement over the primary term. The VAT element of the equipment cost is spread throughout the agreement.
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