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Types of Leasing

Finance Leasing

The Finance Lease is closest to the Hire Purchase alternative. The Finance Company recovers the total cost of the equipment, plus any charges, over the period of the lease.

The business customer does not own the equipment; they have most of the risks and rewards associated with ownership. They are responsible for maintaining and insuring the asset and must show the asset on the balance sheets as a capital item.

At the end of a lease period, the finance company will usually agree to a secondary lease period at a vastly reduced rental. As an alternative, if the business wishes to stop using the equipment, it may be sold to an unconnected third party but must be sold for fair market value. The finance company retains the bulk of the proceeds of sale.

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Operating Leasing

If a business requires a piece of equipment for a shorter period, then operating leasing may be the answer. The finance company will lease the equipment, expecting to sell it second hand on expiry of the lease or lease it to someone else.
It will not need to recover the full cost of the equipment through the lease rentals.

This type of leasing is common for equipment where it has a well established second hand market, such as cars, construction equipment, and printing equipment.
The lease period in this case would usually be for two to three years, however it may be for a longer period, but it is always less than the expected working life of the machine.

In this case the customer would not enter the asset on its balance sheets as a capital item.

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Contract Hire

Contract Hire is a form of an operating lease most commonly used with vehicles. The finance company would undertake some responsibility for the management and maintenance element of the vehicle. Services can be included as well as repair costs such as replacement of tyres and batteries, providing replacement vehicles, roadside assistance and recovery services and payment of the vehicle licences.

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