17.4 : Financial Leases

A financial lease, also referred to as a capital lease, is a long-term contractual arrangement that enables lessees to access the benefits of an asset without purchasing it outright. This leasing model effectively transfers most risks and rewards of ownership to the lessee, making it particularly advantageous for businesses that require substantial equipment but may lack the upfront capital or collateral for a traditional loan.

A financial lease is typically non-cancelable and fully amortized, meaning the lease payments cover the asset's entire cost and provide a return on investment for the lessor. Under this arrangement, the lessee assumes maintenance, insurance, and operational costs. Additionally, the lessee often gains tax advantages, as the Internal Revenue Service (IRS) allows lease payments to be deducted as business expenses in many cases, reducing taxable income.

Financial leases provide businesses with critical assets without substantial initial expenses or the need for collateral, making them a preferred option for companies seeking financial flexibility. While the total cost of a financial lease may exceed the cost of an outright purchase, the ability to spread payments over time and gain access to necessary equipment often outweighs this drawback. For lessees, financial leases offer an effective mechanism to balance operational needs with financial constraints.