Finance leases for equipment you use but do not need to own.

Under a finance lease the lender buys the equipment and leases it to your business for a fixed term at fixed monthly payments, with a residual value set at the start. You use the asset as if you owned it, and at the end of the term you pay the residual, refinance it, or sell the asset to a third party and settle the residual from the proceeds. Terms commonly run 12 to 60 months. Because the lender owns the asset during the term, it suits businesses that refresh equipment regularly and prefer rental-style payments.

With a finance lease you take on most of the risks and rewards of ownership: you are responsible for the residual value at the end, and you can end up owning the asset. With an operating lease you simply rent the asset for a term and hand it back, and the lessor carries the residual risk. Operating leases usually cost more per month but remove the end-of-term exposure, and often bundle maintenance. Finance leases suit assets that hold value; operating leases suit technology and vehicles that are replaced on a cycle.

The residual value is the amount left owing at the end of a finance lease, set at the start based on what the asset is expected to be worth. A higher residual lowers the monthly payment but leaves more to pay or refinance at the end. In Australia the ATO publishes minimum residual percentages by lease term, which lenders follow, typically from around 65 per cent of cost on a one-year lease down to about 28 per cent on a five-year lease. Your broker explains the residual on each quote and what your options are when it falls due.

At the end of the term you settle the residual value. Most businesses do one of three things: pay the residual and take ownership, refinance the residual into a new agreement, or sell the asset and use the proceeds to pay the residual, keeping any surplus. If the sale price is below the residual, you make up the shortfall. Some lenders also allow the lease to be extended. Plan the exit early, because a well-maintained asset sold at the right time can make the final step cost very little.

Lease payments on a finance lease are generally tax deductible for the business-use portion, and GST is charged on each payment rather than on the purchase price, so you claim the GST progressively on each BAS instead of upfront. That is the opposite of a chattel mortgage, where GST is claimed on the purchase price at the start. For businesses that report under the accounting standard AASB 16, leases are recognised on the balance sheet; many small businesses use simplified reporting and are not affected. Confirm the treatment with your accountant.

Usually yes, but there is a cost. Ending a finance lease early means paying out the remaining rentals, often at a discount, plus the residual value, and some lenders add an early termination fee. Upgrading is more common: the lender pays out the existing lease and rolls any shortfall into a new lease on the replacement asset. If you expect to change equipment before the term ends, tell your broker, because lease terms and residuals can be structured to make that cheaper.

You are. Under a finance lease the business using the asset is responsible for insuring it, maintaining it and meeting any registration or compliance costs, even though the lender holds legal ownership during the term. Lenders require comprehensive insurance with their interest noted and may ask for evidence each year. This is different from a fully maintained operating lease, where servicing and sometimes insurance are bundled into the payment.

With an operating lease the lessor keeps the residual risk: you return the asset and walk away. With a finance lease you are responsible for the residual value at the end and usually end up owning or selling the asset. Operating lease payments are typically higher per month because the lessor carries that risk, but they include no end-of-term exposure and often include maintenance. Finance leases suit assets that hold value; operating leases suit assets you want to cycle.

We start with a conversation about your business. To assess your options, lenders commonly need identification and recent business bank statements. Depending on the loan, they may also request BAS, financials or statements for existing debts. Your broker gives you a clear list for your situation.

Lenders publish maximum residual or balloon percentages that fall as the term lengthens, because the asset is worth less at the end of a longer term. For a vehicle, a common pattern is up to roughly 50% on a two-year term, reducing to around 20% to 30% on a five-year term. The ATO also sets minimum residual values for finance leases. A larger balloon lowers monthly repayments but increases total interest and leaves a lump sum to deal with at the end.