Finance Lease vs Operating Lease: Which Is Right for Your Business?
08 Nov 2022
The current economic environment presents challenges for individuals and businesses, impacted by the COVID-19 pandemic and rising living costs. Despite this, many are still looking to innovate and upgrade technology and vehicles. Key questions include whether to buy or rent and how to fund these purchases. This article explores these leasing options and provides insights into making informed financial decisions.
Finance Lease
Paying cash up front may appeal to some who are averse to a certain level of debt but is not necessarily the best utilisation of your own funds. As a general rule of thumb, any cash outflow should be matched against any income derived from the acquired asset to assist with future cash flow. A finance lease also referred to as a hire purchase, is a mechanism that allows you to purchase an asset by paying for it over installments rather than upfront. Once the obligations of the agreement have been met, ownership of the asset is then transferred to the purchaser.
On face value, this seems to be a valuable option to consider, you immediately gain all the benefits and values which the asset provides, given your payments are spread over time. However, based on the negotiated repayment terms, at the end of the agreement, you have likely paid more than what the asset is worth at the time of acquisition, considering the interest and any additional maintenance costs required during
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