Leasing a commercial vehicle remains one of the most cost-effective ways for UK businesses to modernise and expand their fleets without tying up large amounts of capital. With a wide range of leasing products available, choosing the right one can feel complex. Every business operates differently, and a funding method that suits one company perfectly may not be the most efficient choice for another.
Finance Lease is one of the most popular funding methods for commercial vehicles, especially for organisations that require flexibility, predictable budgeting, and full operational control. Understanding how this agreement works—before you commit—is essential for making the best long-term decision for your fleet.
What is a Finance Lease?
A Finance Lease is a commercial funding agreement between your business and the leasing provider, allowing you full use of the vehicle over an agreed term. While the vehicle appears as an asset on your balance sheet, legal ownership always remains with the funder.
Finance Lease is strictly a business-only product and can be used by:
- Limited companies
- LLPs
- Sole traders
- Partnerships
This type of lease is ideal for businesses that want access to new or nearly-new vehicles without the high upfront costs associated with purchasing, and without the restrictive conditions that apply to Contract Hire.
Many Finance Lease agreements can also be paired with optional full-maintenance packages, covering routine servicing, tyre replacement, mechanical repairs, and nationwide breakdown assistance—ensuring predictable running costs across the duration of the lease.
How do Finance Lease payments work?
Your Finance Lease will typically begin with an initial rental, commonly equivalent to three monthly payments. To reduce ongoing monthly costs, you can choose to pay a larger initial rental—often six, nine, or twelve rentals upfront.
You can structure the agreement in two main ways:
1. Finance Lease with a final rental (balloon)
A portion of the vehicle’s cost is deferred to the end of the agreement. This balloon payment is calculated according to the vehicle’s projected resale value based on:
- Contract length
- Vehicle type
- Expected annual mileage
Because mileage directly affects the vehicle’s resale value, providing an accurate estimate at the start of the agreement is essential.
2. Finance Lease without a final rental
The total value of the vehicle is spread evenly across all monthly rentals. This avoids a balloon payment but results in slightly higher monthly costs.
Either option gives you control over how you manage your business’s cash flow.
What happens at the end of a Finance Lease?
At the end of your agreement, you have two primary options:
1. Sell the vehicle
This is the most common route. The vehicle must be sold to a third party because financial regulations prevent you from taking ownership.
You can:
- Sell the vehicle yourself on behalf of the funder
- Ask the funder to handle the sale for a small administration fee
Typically, the business retains around 95–98% of the sale proceeds (percentage varies by funder). These proceeds are used to settle the balloon payment.
If the sale price exceeds the final rental, you keep the surplus. If it sells for less, you are responsible for the difference.
2. Extend the lease (peppercorn rental)
Instead of selling the vehicle, you may choose to continue using it on a peppercorn rental—a nominal annual fee usually equal to one monthly rental. This allows businesses to maximise value from a vehicle they already know and trust.
What are the benefits of a Finance Lease?
Finance Lease offers a range of advantages, especially for companies that need more flexibility than Contract Hire typically allows.
Key benefits:
✔ No end-of-contract damage or mileage penalties
Unlike Contract Hire, you won’t face charges for dents, wear-and-tear, or above-budget mileage. However, these factors may impact resale value.
✔ Potential profit at the end
If the vehicle sells for more than the balloon payment, your business keeps the majority of the surplus—an attractive option for companies that maintain vehicles well.
✔ Flexible payment structures
Choose higher initial rentals, lower monthly payments, or balloon payments—whichever best suits your cash flow.
✔ Asset on the balance sheet
The vehicle appears as a business asset, which may benefit certain accounting strategies and balance-sheet presentations.
✔ VAT benefits
Businesses can reclaim up to 100% of the VAT on monthly rentals (subject to HMRC rules and depending on vehicle use).
✔ Access to newer vehicles
Drive the latest models without the financial burden of full ownership.
✔ Low initial outlay
Initial rental can be as little as three months’ instalments—ideal for businesses managing budgets carefully.
What about the downsides?
As with everything in life, Finance Lease does have its disadvantages for certain companies. You will never own the vehicle as part of a Finance Lease agreement, as it must be sold at the end of the term. You are also responsible for a Road Fund Licence after the first year, and in most cases, you will be responsible for maintenance and servicing the vehicle too.
What is the difference between Contract Hire and Finance Lease?
 
 
