A finance or capital lease is probably the most upfront leasing option. As explained by Export Finance, finance leases are used in the manufacture of equipment for export. A leasing company buys the equipment you make, then leases it out to an overseas buyer. At the end of the leasing period, the buyer may purchase the equipment by paying for its residual value.
Here’s how a typical financial lease system works.
- Exporter enters a sale contract with lessor.
- Lessor enters a lease contract with buyer.
- Exporter delivers equipment to buyer.
- Lessor pays exporter for the equipment.
- Buyer makes payments to lessor.
A finance lease may also be applied in a car purchase. In such a case, the customer buys a car through a leasing company, who pays for the car on behalf of the customer. The customer then pays the leasing company in instalments, under a lease arrangement. While the lease contract is in effect, the car remains in the ownership of the leasing company. Once the lease contract has ended, the customer can buy the car by paying the residual value, or the last instalment for the vehicle.
A finance lease offers the added benefit of tax deduction if the car is used for business. With a residual value and GST financing in play, monthly payments can drop significantly. Another benefit is that finance leases require no down payment. The equipment or vehicle itself acts as security for the lessor.