Residual value: what it means for business borrowing

Residual value is the estimated value of an asset at the end of a finance or lease term. It matters because it decides who pays for the asset's loss in value, and so how big the regular payments are.

01How residual value sets the payments

On an operating lease or contract hire, the lender expects to get the residual value back by selling or re-leasing the asset when you return it. Your rentals cover the difference between the price and that residual value, plus the lender's charges. The higher the residual value, the lower the rentals.

02An example

A business leases a £40,000 van for three years. If the lender expects it to be worth £16,000 at the end, the rentals need to cover about £24,000 of depreciation plus finance costs. A van expected to be worth £10,000 would need rentals covering about £30,000. Mileage and condition limits protect the lender's estimate, and excess mileage or damage is charged when the van goes back.

03Who carries the risk

04How it affects borrowing

Assets that hold their value well, such as some vehicles and plant, tend to suit leasing and balloons. Specialist or fast-changing assets have uncertain residual values, so lenders either set them low or prefer full-payout finance. Compare structures in our finance lease vs operating lease guide, and see asset finance for the options we arrange. Any broker fee depends on the lender, with nothing to pay upfront.

05Related terms

• Balloon payment
• Operating lease
• Sale and leaseback

06Sources

• GOV.UK: Annual Investment Allowance