A finance lease agreement is a leasing arrangement in which the lessee (the business acquiring the asset) obtains the right to use an asset for most of its life in exchange for regular lease payments.
Finance leases are often used by businesses that require the use of an asset for an extended period but do not want to bear the full cost of ownership. It allows them to use the asset while spreading the cost over time.
Unlike a hire purchase agreement where ownership is transferred, in finance leasing, the lessor (the owner of the asset) retains ownership throughout the lease term. Here's an overview of what's involved in an IT finance lease agreement:
Asset Selection. The business, with the help of its IT company or internal IT manager, selects the IT equipment they wish to lease from the lessor.
Lease Term. The business (lessee) and lessor agree upon the lease term, which is usually longer than an operating lease, and it can range from several months to several years.
Lease Payments. The business makes regular lease payments to the lessor over an agreed period. These payments cover the use of the asset and are often structured to include interest charges and other fees.
Purchase Option. At the end of the lease term, a finance lease agreement may offer the business the option to purchase the asset from the lessor. The purchase price is typically determined by the residual value of the asset at the end of the lease term.