Finance Lease — definition
Lease structure that transfers substantially all the risks and rewards of ownership of an asset to the lessee, typically over a term approximating the asset's useful life.
Under a finance lease, the lessee usually records the asset and corresponding liability on its balance sheet under most accounting standards, and often has an option to acquire ownership at the end of the term for a nominal amount. It contrasts with an operating lease, which more closely resembles a rental arrangement.
Why it matters to industrial buyers
Finance leases allow buyers to use equipment immediately while spreading payments over time, an option that can suit companies wishing to preserve cash without an outright purchase.
Key reference points
Accounting treatment
Finance leases are typically capitalised on the lessee's balance sheet as both an asset and a liability.
Commonly confused with
Operating lease
A finance lease transfers substantially all ownership risks and rewards to the lessee; an operating lease more closely resembles a rental with the lessor retaining ownership risk.
How it is used in practice
A processor enters a finance lease for a refrigeration unit, with an option to purchase the asset at the end of the five-year term.
Frequently asked questions
Does the lessee own the asset during a finance lease?
Legal title commonly remains with the lessor until any purchase option is exercised, though the lessee bears most ownership-type risks and rewards.
Is a finance lease reported on the balance sheet?
Yes, typically; finance leases are capitalised as an asset and liability under most current accounting standards.
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Related terms
Operating Lease
Lease arrangement under which the lessor retains substantially the risks and rewards of ownership, typically covering a period shorter than the asset's full useful life.
Equipment Financing
Financing arrangement in which a lender provides funds specifically to purchase machinery or equipment, typically secured by the equipment itself as collateral.
Sale-and-Leaseback
Financing transaction in which a company sells an asset it owns, such as equipment or a facility, and simultaneously leases it back to continue using it operationally.
OPEX vs CAPEX
Accounting distinction between operating expenditure, which is expensed as incurred, and capital expenditure, which is capitalised and depreciated over an asset's useful life.
Vendor Financing
Financing arrangement in which an equipment supplier or its affiliated finance arm extends credit terms directly to the buyer to facilitate the equipment purchase.
More in Project & Equipment Financing
Reference content only. Global B2B Group is independent of equipment manufacturers and financing institutions; definitions are provided for education and do not constitute engineering, financial or legal advice.