Finance Lease

A finance lease, also known as a capital lease, is essentially a long-term rental agreement with some key characteristics:

  • Ownership transfer – The lessor (typically a finance company) owns the asset but grants the lessee (the business) full control over it for the lease term. Ownership often transfers to the lessee at the end of the lease for a minimal fee.
  • Economic risks and rewards – The lessee bears most of the risks and rewards of ownership. This means the lessee is responsible for things like maintenance and depreciation, but also benefits if the asset value increases.
  • Lease payments – Lease payments are structured to cover the asset’s cost and a return on investment for the lessor.

In simpler terms, a finance lease allows a business to use an asset like they own it, with eventual ownership possible, while spreading out the cost over time.