In a Finance Lease the risks and rewards of ownership are passed to the borrower (Lessee) and the total cost of the asset is amortised over the life the lease. Normally, the funding period is linked to the assets depreciation policy. A Finance Lease can be advantageous in terms of tax deductions for a business, as normally the relief from the rentals is greater than the capital allowances over the term of the lease. A Finance Lease is disclosed on the balance sheet of the Lessee.
In an Operating Lease the risks and rewards of ownership remain with the Lender (Lessor). Typically, the lease is for a shorter period than a Finance Lease and a proportion of the cost of the asset (the residual value) is not payable by the Lessee. To be classified as an Operating Lease the lease pricing and terms and conditions must pass various tests under International Accounting Standards and/or UK GAAP. This is a specialist area which requires bespoke structuring. Subject to auditor approval such leases can be classified as off balance sheet.
With Receivables Finance the cost of an asset is financed by selling the associated income stream to a lender. Such financing can be structured in many ways and can be either disclosed or undisclosed to the borrower. Receivables Finance is mostly used in a sales aid role to provide financing through a supplier to effect the sale of the asset.
Trade Finance facilitates the sale of an asset using Letters of Credit or a guarantee/insurance frequently with the support of an Export Credit Agency or an independent insurance company. Normally, the assets will be imported or exported and the structuring of the debt will involve a combination of insurance, ECA support or bank guarantees. Each scenario will be unique and will require specialist support to effect the most appropriate financial solution.
Cross Border Finance refers to financing where the lender and borrower are based in different tax jurisdictions. Typically such funding will be for larger capital acquisitions and will incorporate a cross border lease structure or payment by Bill of Exchange. Often either finance leases or operating leases can be structured, with certain countries being more receptive to such structures depending on the tax treaties in force.