Quick answer
A lease is an agreement where one party, the lessor, lets another, the lessee, use an asset for a set period in return for regular payments, without transferring ownership. In Australian business finance it usually means either an equipment lease, such as a finance or operating lease over vehicles and machinery, or a lease of business premises. Both affect how lenders assess your business.
Key points
- The lessor owns the asset; the lessee pays to use it for an agreed term
- Equipment leases come in two main forms: finance leases and operating leases
- GST on lease payments is claimed payment by payment, unlike a chattel mortgage
- Your premises lease matters to lenders too: remaining term, rent and landlord consents
Leasing is renting with paperwork. You get the use of something you don’t own, whether that’s a forklift or a shopfront, for an agreed period and an agreed price. The owner is the lessor; the business paying to use it is the lessee.
In business lending the word turns up in two quite different places, so it’s worth separating them.
Equipment leases
Here the leasing company buys the asset you choose and rents it to you. Because it remains the owner, it doesn’t need a separate security arrangement over the item, which can make approval simpler for newer businesses.
There are two main types, alongside the ownership-based alternatives you’ll often see quoted next to them:
| Finance lease | Operating lease | Chattel mortgage | |
|---|---|---|---|
| Legal owner during the term | Lessor | Lessor | You, from day one |
| Typical term | Most of the asset’s useful life | Shorter than its useful life | Flexible |
| End of term | Pay the residual, trade in or re-lease | Return or upgrade | Pay any balloon, keep the asset |
| Servicing included | Rarely | Often | No |
| GST | Claimed on each lease payment | Claimed on each rental | Claimed upfront on the purchase price, if registered |
That GST row is one of the most practical differences. Lease rentals carry GST inside every payment, so the credit trickles back through your BAS over the whole term. Buy the same asset with a chattel mortgage and, if registered for GST, you’d normally recover the full GST component in the activity statement covering the purchase, a sizeable early refund.
Compare the options side by side in finance lease vs operating lease or leasing vs buying equipment.
A worked example
A Ballarat printing business needs an $85k digital press. It weighs two routes over four years:
- Finance lease with a residual: monthly payments include GST, claimed each quarter. At the end, the owner can pay the residual and keep the press, or hand it back and lease the next model.
- Chattel mortgage: the business owns the press from settlement and claims about $7,700 of GST on the next BAS (one-eleventh of the GST-inclusive price), then repays the loan over the term.
The owner expects printing technology to move on within four years and values the option to upgrade, so the lease wins despite the slower GST recovery. Model the repayments in our equipment finance calculator.
Not sure whether leasing or owning suits the asset you need? Ask us to compare the two for your situation.
Premises leases, and why lenders read them
A lease over your shop, office, warehouse or factory is the other common meaning. Retail tenancies are also governed by state legislation, such as the Retail Leases Act 1994 in NSW, which sets rules on disclosure, minimum terms and rent reviews.
A lender reading your premises lease will usually focus on four things:
- Remaining term: a loan running five years for a business with eight months left on its lease raises an obvious question.
- Rent: usually among the largest fixed outgoings a business carries, it feeds straight into serviceability.
- Landlord consents: fitting out leased premises may need a landlord waiver, and buying a business usually needs the landlord’s consent to assign the lease.
- Your balance sheet: under accounting standard AASB 16, entities preparing general purpose financial statements generally show most leases as a right-of-use asset with a matching liability, so a long lease can make a balance sheet look more geared than the owner expects.
Related terms
Hire purchase, operating lease, finance lease, sale and leaseback and asset finance.
Leasing equipment or premises for your business?
Whether you’re choosing between a lease and a loan, funding a fit-out in rented premises or listing leased assets in a wider loan application, the structure shapes your cash flow for years. Our form takes about a minute to fill in. Sending it has no effect on your credit file, and your enquiry isn’t passed down a chain of finance companies. One of our team members works through the details and gives you a ring. Accurate information on the asset, its cost and your lease term means the first option we raise is the one that fits.
Frequently asked questions
What's the difference between a finance lease and an operating lease?
A finance lease runs for most of the asset's useful life and usually ends with a residual payment, after which you may buy the asset. An operating lease is shorter, often includes servicing, and the asset goes back to the lessor at the end. Finance leases suit assets you want to keep; operating leases suit assets you upgrade regularly.
Do I own the equipment at the end of a lease?
Not automatically. The lessor owns it throughout. With a finance lease you can often buy it by paying the residual, or trade it in. With an operating lease you usually hand it back or start a new lease on newer equipment.
Are lease payments tax deductible?
For assets used in the business, lease payments are generally deductible as they're paid, rather than claimed through depreciation. The exact treatment depends on your circumstances, so confirm it with your accountant.
Can I get a business loan if I lease my premises rather than own them?
Yes. Plenty of unsecured, cash flow and equipment loans go to businesses that rent. Lenders will look at how long is left on the lease, because a business with three months remaining and no renewal carries more uncertainty than one with a five-year term and options.
What's a novated lease?
A novated lease is a three-way arrangement between an employee, their employer and a lessor, usually for a car, with payments made from the employee's salary. It's a salary packaging tool rather than a way for a business to fund its own equipment.