What is a finance lease?
A finance lease is a way of paying for equipment in which the finance company buys the asset and leases it to the business for a primary period, typically the greater part of the asset’s useful life, in return for rentals that repay the cost and the finance charge. The business uses the asset as if it owned it, maintains and insures it, and carries the risk of it losing value; the finance company stays the legal owner throughout. In the accounting standards, the test for a finance lease is that it transfers substantially all the risks and rewards of ownership to the lessee (FRS 102, section 20).
At the end of the primary period the business does not take ownership. It either continues to use the asset in a secondary period at a much reduced rental, or the asset is sold to a third party and the business receives the greater part of the sale proceeds as a rebate of rentals. That end-of-term treatment is the clearest difference from hire purchase, where the business owns the asset once the final payment is made.
How a finance lease runs
The business chooses the asset and the supplier. The finance company pays the supplier and becomes the owner. The business pays an initial rental, often expressed as a number of months’ rentals in advance, then monthly or quarterly rentals over the primary period, usually at a fixed amount. The business is responsible for maintenance, insurance and any damage, exactly as an owner would be.
When the primary period ends, one of three things happens, as the agreement sets out. The business pays a secondary rental, sometimes called a peppercorn, and goes on using the asset. The asset is sold and the business receives most of the proceeds as a rebate. Or the business returns the asset. Because the finance company owns it, the business cannot simply buy it at the end for a nominal sum; an agreement that lets it do so is a hire purchase agreement, not a lease, whatever it is called.
Finance lease against hire purchase
Both spread the cost of an asset over a term and both are secured on the asset itself. On hire purchase the business pays a deposit, pays instalments and owns the asset when the final payment and the option-to-purchase fee are made; on a finance lease the business never owns it. On hire purchase the VAT on the asset is normally payable with the deposit; on a lease the VAT is charged on each rental. The capital allowances and the VAT treatment differ between the two, and they differ again with the kind of asset, so the choice is one to take with your accountant before the agreement is signed, not after.
Which one a business uses is its own decision. Equipment the business intends to keep for its whole life is commonly bought on hire purchase; equipment replaced on a cycle, where the business wants to hand it back or roll into a new one, is commonly leased.
Finance lease against operating lease and contract hire
An operating lease is a shorter hire in which the finance company keeps a real stake in the asset’s value at the end: the rentals do not repay the whole cost, and the asset goes back to the lessor, which relies on its residual value. Contract hire is an operating lease for vehicles, usually with maintenance bundled in. A finance lease, by contrast, repays substantially the whole cost over the primary period, which is why the business bears the residual risk and receives most of the sale proceeds.
What a lessor asks for
The supplier’s quote in the company’s name, the last filed accounts, the last 3 months of bank statements or an Open Banking connection, and the details of the asset: make, model, year and, for a used asset, condition. The lessor reads the asset first, because it will own it: what it would fetch if it had to be collected and sold sets which lessors will write the lease and on what terms. Each lessor publishes its own terms and they change; nothing on this page is a quote.
We arrange finance only once a business has traded for 3 months, for amounts from £10,000. We work with UK limited companies and LLPs only, for business and commercial purposes. Enquiring does not affect your credit score. If you apply to a lender, it runs its own credit search, which may be recorded on your file.
Frequently asked questions
Does a finance lease show on the balance sheet?
Under FRS 102 a lessee records a finance lease as an asset and a liability on its balance sheet, because it carries the risks and rewards of ownership. The accounting treatment is for your accountant to confirm for your company and the asset in question.
Can I end a finance lease early?
Each agreement sets its own early termination terms. Because the rentals are calculated to repay the cost over the primary period, ending early usually means paying the outstanding rentals less a rebate, with the asset sold and the proceeds credited. Read the termination clause before signing.
Who insures and maintains the asset?
The business does, under the terms of the lease, even though the finance company owns the asset. A lease that includes maintenance is a different product, closer to contract hire.
Is a finance lease available on used equipment?
Within each lessor’s own rules on age and value at the end of the term, yes. The resale market for the asset decides most of it.
Is CapExpand regulated?
CapExpand Ltd (FRN 1060885) is a credit broker and an Appointed Representative of White Rose Finance Group Limited (FRN 630772), which is directly authorised and regulated by the Financial Conduct Authority. We are a broker, not a lender. We work with UK limited companies and LLPs only, for business and commercial purposes. If you have a complaint, our complaints page explains how it is handled.
How is CapExpand paid?
We will receive commission from lenders. On some cases we also charge a fee, which we set out in writing and agree with you before you proceed.
More funding questions answered
- What is an unsecured business loan?A fixed sum lent to a company without a charge over any asset, on its accounts and bank statements, and almost always with a personal guarantee.
- What is a floating charge?Security over a changing class of assets such as stock and book debts, which crystallises into a fixed charge on a default; how it differs from a fixed charge and what it is worth on insolvency.
- What is a decision in principle?A lender’s indication, on the papers and before a valuation or full underwriting, that it would lend a stated amount on stated terms; what it is worth and how it becomes an offer.
- What is mezzanine finance?The layer between the senior debt and the equity: a second charge or a subordinated loan that fills the gap a senior lender will not, on a development or an acquisition.
- What is a business overdraft?A limit on the current account the business draws into and repays at will, charging interest on the overdrawn balance and repayable on demand; arranged with the bank, not a broker.
- What is a management buyout?The purchase of a company by the managers who run it, through a new company funded by senior debt, a vendor loan note and the managers’ own equity.
Leasing a piece of equipment
The asset, the amount and how long the company has traded are enough for us to check which lessors’ published criteria the case meets before anything is sent anywhere.
Sources
Checked 26 October 2026. The accounting and tax treatment of a lease depends on the company and the asset; this page explains the structure and is not accounting or tax advice.
CapExpand Ltd (FRN 1060885) is a credit broker and an Appointed Representative of White Rose Finance Group Limited (FRN 630772), which is directly authorised and regulated by the Financial Conduct Authority. We are a broker, not a lender. We work with UK limited companies and LLPs only, for business and commercial purposes. We do not provide financial advice.