A car leased for four years will potentially have a value of say 40% of its price today. As the lease payments are tax deductible for the user, it is only fair that the maximum claim over the four years would be 60%.

At the end of the lease term the user must pay the residual amount. This can be done by:

• • Re-leasing for another term

• Offering to buy the asset, usually for the amount of the residual

• Trading the asset on a replacement and paying any shortfall/keeping any profit

Novated lease is the only equipment finance product where the asset does not need to be used for at least 51% business use.

A Novated Lease agreement is where an employee leases a car and then sub-leases (novates) it to their employer who pays the lease rentals. The employer agrees to have the lease novated to them while the employee remains in their employment. The employee remains fully liable for the debt and failure of the employer to pay the rentals constitutes default.

The employer is able to treat the lease rentals as a business expense despite the fact that the rentals made on behalf of the employee are not necessarily incurred in carrying on the business. The lease is a liability for the employee and does not affect the employer’s balance sheets and borrowing capacity.

An Operating lease is a pure rental agreement, with no documented residual (however, the financier may in fact take the risk of covering the residual). The goods can be returned to the financier when the agreement expires.

Operating Leases are usually limited to motor vehicles, computers and multi purpose industrial equipment such as forklifts, as these have a sufficiently sizeable second hand market. A reasonable estimate of future value can be made.

Depending on business usage, the interest portion of the regular repayments and depreciation can be claimed as tax deductions.

Flexibility of the structure of Commercial Hire Purchase agreements is an attractive feature. An unlimited amount of deposit can be made by way of cash or trade-in and a choice of either full repayment over the term or a lump sum (balloon) payment at the end of the agreement can reduce the monthly commitment and assist cash flow.

While there is no minimum lump sum payment (balloon) at the end of an Asset Purchase agreement, the maximums are as per those for lease residuals. This is to ensure that the lender always has sufficient security to cover the debt.