Here are some notes on finance leases in equipment leasing/lease financing in detail:
- Finance leases are a type of lease that is treated as a loan for accounting purposes. This means that the lessee must capitalize the lease on their balance sheet and amortize the lease payments over the lease term.
- The lessee in a finance lease is essentially borrowing money from the lessor to purchase the equipment. The lease payments are the repayment of the loan, plus interest.
- At the end of the lease term, the lessee typically has the option to purchase the equipment for a nominal amount. If the lessee does not exercise this option, the equipment reverts to the lessor.
- Finance leases are typically used for equipment that is essential to the lessee’s business. This is because finance leases provide the lessee with the same financial benefits as purchasing the equipment outright, but without having to make a large upfront investment.
- Here are some of the advantages of finance leases:
- The lessee can obtain the use of the equipment without having to make a large upfront investment.
- The lessee can spread the cost of the equipment over the lease term.
- The lessee can obtain tax benefits from the lease payments.
- Here are some of the disadvantages of finance leases:
- The lessee will have to make lease payments for the entire lease term, even if the equipment is no longer needed.
- The lessee may be responsible for maintenance and insurance on the equipment.
- The lessee may not be able to sell the equipment at the end of the lease term.