Financial Lease Agreements: Understanding the Basics

When it comes to leasing a piece of equipment or real estate property, there are two primary types of lease agreements: operating lease and financial lease. While operating lease is perfect for short term agreements, financial lease is ideal for businesses looking to acquire long term assets without the need for high upfront capital.

What is a Financial Lease Agreement?

A financial lease agreement is a legal contract between two parties: the lessor and the lessee. The lessor is the owner of the asset (equipment or property) and the lessee is the party leasing the asset for a fixed term at a fixed rate. Under this type of agreement, the lessee, after paying all the lease payments and fulfilling all the requirements of the agreement, will own the asset at the end of the lease term.

How Does it Work?

Under a financial lease agreement, the lessor purchases the asset for the lessee. The lessee then pays monthly installments, which comprise of both principal and interest, to the lessor over the lease term. The repayment period is typically between three to five years, but it can be as long as ten years depending on the asset`s lifespan.

At the end of the lease period, the lessee has the option to purchase the equipment at its residual value, which is a predetermined amount agreed upon in the lease agreement. Once the residual payment is made, the lessee becomes the outright owner of the equipment.

Advantages of Financial Lease

Financial lease agreements can be beneficial for businesses that require expensive equipment or property but don`t have the capital to purchase them outright. It enables them to use the equipment or property without making a large upfront payment.

Additionally, businesses can claim tax deductions on the lease payments made, which helps to reduce their tax liability and boost their cash flow. Financial lease agreements are also easier to obtain than traditional loans or lines of credit, as they typically require minimal documentation and credit checks.

Conclusion

In summary, financial lease agreements are a great way for businesses to acquire long term assets without having to pay a large sum upfront. Companies can benefit from the asset while spreading the cost by making monthly installments over a fixed period. It`s essential to work closely with a qualified leasing company to ensure that the agreement is structured to meet the specific needs of the business. By doing so, businesses can acquire the necessary equipment or property to grow their operations and increase their bottom line.