finance lease
Finance Lease is a rental deal that acts like a loan, letting a business use an asset for most of its life while carrying the risks and rewards of owning it.
In plain English
Danjuma at the bus park owns his rickety Hilux outright, and every dent, every service, every headache is his to carry, but so is every naira it earns him.
Bimpe two lots down does not own her bus at all, she pays a leasing company monthly for a brand new one, and when something breaks, she is still the one calling the mechanic and paying the bill, even though her name is not on the vehicle papers.
That second situation is a finance lease. A company like a Lagos logistics business needs a fleet of delivery vans but does not want to tie down ₦40,000,000 in cash buying them outright, so it leases them instead from a finance company for four years, which happens to be almost the entire useful life of the vans.
On paper, the logistics company does not own the vans. In practice, it insures them, maintains them, bears the risk if one is written off, and enjoys all the benefit of using them daily, which is why accountants insist the vans go on the company's balance sheet as an asset, with a matching lease liability, rather than being treated as a simple rental expense.
This matters for anyone reading a company's financial reporting, because a finance lease calmly changes how healthy a balance sheet looks, adding both an asset and a debt that a casual reader might miss if they only glance at the cash flow statement.
In the United Kingdom, a small manufacturing firm might finance lease its factory equipment rather than buy it outright, spreading the cost over five years while still being treated, for accounting purposes, as the true economic owner of that machinery.
A Kano printing press leases a ₦15,000,000 industrial printer for five years, paying ₦280,000 monthly. The printer's useful life is about five and a half years, so the lease covers almost all of it. The press records the printer as an asset worth ₦15,000,000 and a matching liability, even though the leasing company technically holds the title until the final payment clears.
Questions people ask
How is a finance lease different from an operating lease?
A finance lease transfers most of the risks and rewards of ownership to the person using the asset, and it usually runs for most of the asset's useful life, so it appears on the balance sheet as an asset and a liability. An operating lease is closer to plain renting, shorter term, with the owner keeping the real risks and rewards, and it is treated more simply as an expense.
Who legally owns the asset in a finance lease?
Often the leasing company keeps legal title until the final payment or an option to purchase is exercised. But accounting rules look past the paperwork and ask who really carries the risks and enjoys the benefits, and that party records the asset on their books.
Why would a Nigerian business choose a finance lease instead of a bank loan to buy equipment?
A finance lease can require less upfront cash than a loan deposit, spreads payments predictably over the asset's useful life, and sometimes comes with easier approval than a traditional loan, especially for businesses without a long credit history.
Last reviewed