Legal Definitions - finance lease

A finance lease is a type of lease used by businesses to finance capital equipment. The lessor finances the asset, and the lessee pays maintenance costs and taxes and has the option of purchasing the asset at lease-end for a nominal price. Finance leases are written almost exclusively by financial institutions to help commercial customers obtain expensive capital items that they might not otherwise be able to afford.

Example: A construction company needs a new crane but cannot afford to purchase it outright. The company enters into a finance lease with a financial institution, which purchases the crane and leases it to the construction company. The construction company pays monthly lease payments and has the option to purchase the crane at the end of the lease term for a nominal price.

This example illustrates how a finance lease allows a business to obtain expensive capital equipment without having to pay for it upfront. The business can make monthly lease payments and have the option to purchase the equipment at the end of the lease term, making it a more affordable option for businesses with limited cash flow.