Finance Structure

Finance Lease

Functionally similar to a loan — you pay over time, the asset hits your balance sheet, and you keep the tax benefits, but with leasing-company structure.

Term

5–10 years; commonly 7 years

Cost / rate

Similar to a green loan at 6.5%–9% effective rate. Often slightly higher than equivalent secured bank debt because of leasing-company margin structure, but credit appetite is sometimes broader.

Worked IRR

Typically 10% to 16% pre-tax IRR — close to green loan economics.

How it works

A finance lease is the structurally interesting cousin of an operating lease and a loan. It looks like a lease (the lessor holds legal title, rentals are paid, end-of-term peppercorn purchase) but it functions like debt-financed ownership (the lessee captures all the tax benefits, the asset is capitalised on balance sheet, the rentals split into capital and interest portions much like a loan amortisation). The reason finance leases exist alongside loans is partly historical, partly tax-administrative, and partly about which credit team in which institution wants to write the deal. For a borrower, a finance lease and a secured green loan are economically very close — both leave you with the asset and the tax benefits, both cost roughly 6–9% effective per year, both run 5–10 years. The choice often comes down to which lender offers the better rate for your specific covenant. We treat finance lease and green loan as parallel options and quote both for any client where capital purchase isn't the chosen route.

Worked example: 250kWp on a £200,000 commercial system

Upfront

£0–£15k (some lessors take 5–10% deposit; others zero)

Year-one cash position

Year-one rentals ~£28k–£32k. Year-one electricity saving ~£42k. FYA tax saving ~£25k. Net year-one cash position: positive £35k–£39k.

25-year cumulative

+£900k to +£1.2m cumulative free cash flow.

IRR

Typically 10% to 16% pre-tax IRR — close to green loan economics.

Best fit

  • ● Profitable companies wanting to keep capital allowances
  • ● Businesses with existing leasing relationships and committed credit lines
  • ● Property owners using lease finance across other assets for portfolio reasons
  • ● Companies wanting the credit underwriting handled by a leasing arm rather than a bank lending team

Not suitable for

  • ○ Companies that prefer the cleaner narrative of debt finance
  • ○ Smaller systems where lease admin is disproportionate

Pros

  • Lessee captures all tax benefits including FYA
  • Easier credit underwriting than bank debt for some borrowers
  • Fixed, predictable payments
  • End-of-lease ownership transfer for nominal payment
  • Working capital preserved
  • Lease finance arms often more solar-savvy than general business banking

Cons

  • Total cost over 25 years exceeds capital purchase by the finance margin (~£70k–£100k on a £200k system)
  • On-balance-sheet treatment under both FRS 102 and IFRS 16
  • Early termination typically expensive
  • Less consumer-protection regulation than bank debt

Mechanics

Ownership model

Mechanically, the lessor retains legal title throughout the lease, but economically the lessee carries all the risk and reward of ownership. At lease end, the lessee typically takes the asset for a peppercorn payment.

Balance sheet treatment

Capitalised on balance sheet as a right-of-use asset with a corresponding lease liability. Treated similarly to debt-financed asset purchase. Under both FRS 102 and IFRS 16, finance leases are on-balance-sheet.

Tax treatment

The lessee — not the lessor — claims the capital allowances on a finance lease. Critically, this means the 50% First Year Allowance, AIA, and ongoing writing-down allowances flow to the lessee. The interest portion of lease rentals is deductible against trading profits; the capital portion is not (capital allowances replace it).

Who offers it

Asset finance arms of major banks (Lombard, BNP Paribas Leasing, Société Générale Equipment Finance), specialist leasing companies, and manufacturer-backed schemes. Term sheets and effective rates vary widely — comparison is essential.

Other structures

Compare with other finance routes

Capital Purchase

Pay cash, own the asset, claim the full tax relief — the simplest structure and almost always the most economic over 25 years.

Green Loans

Borrow against the project, retain ownership, smooth the cash impact — green loans typically charge 6–9% APR for solar specifically.

Operating Lease

The leasing company owns the system; you pay a fixed annual rent. Off-balance-sheet, fully expensable, but you don't get the FYA.
Compare with other structures

Direct comparisons

Finance Lease vs Operating Lease

On-balance vs off-balance leasing structures, tax allowance capture.

Capital Purchase vs Finance Lease

Direct ownership vs leasing-company structure.

Frequently asked questions

What's the difference between finance lease and operating lease for solar?
Finance lease: lessee captures tax allowances (FYA, special-rate pool), asset appears on lessee balance sheet under FRS 102 full / IFRS 16, lessee retains residual value rights. Operating lease: lessor captures tax allowances, off-balance-sheet under FRS 102 small-entity reporting, lessor retains residual value. Functionally similar monthly payments; tax and accounting treatment differs materially.
Why choose finance lease over capital purchase?
Three reasons: (1) preserve working capital while still capturing FYA — lessee captures tax allowances under finance lease; (2) cleaner separation between fixed lease asset and operating cash flow; (3) sometimes preferred by leasing-company specialists vs traditional bank lending — different decision criteria, sometimes faster process. Finance lease lifetime cost typically 3-5% higher than capital purchase due to lessor margin; for non-cash-constrained companies, capital purchase usually wins on absolute lifetime cost.
How long are finance lease terms for commercial solar?
Typically 7-12 years for commercial solar finance lease structures. Longer than asset finance hire purchase (3-7 years), shorter than operating lease (sometimes 10-15 years). Term reflects lessor underwriting view on solar asset useful economic life — typically 25 years for the asset itself, with lease term covering the period of effective amortisation alongside lessee's tax allowance capture period.
Can finance lease cover battery storage?
Yes. Finance lease structures handle solar + battery combinations well, particularly where the battery has clear residual value characteristics. Some specialist lessors treat battery separately due to shorter useful life (14 years typical) vs solar (25 years); others structure combined facility with explicit battery refresh provisions. Worth specific finance lease quote for combined deployments.
Is finance lease available to charities?
Limited compared to commercial finance lease. Charities subject to corporation tax on trading income through trading subsidiaries can use finance lease structures via the trading subsidiary. Pure charity entities (no corporation tax exposure) can't derive lessee tax-allowance benefits from finance lease — making it functionally equivalent to operating lease without the structural simplicity. Charities typically prefer alternative routes (capital purchase from reserves, charity-specialist debt, foundation grants).

Model Fin Lease alongside the alternatives

We build a side-by-side after-tax comparison across all six structures using your actual numbers — not lender brochure assumptions.

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