Investments are the engine of business growth – without them, production capacity does not increase, efficiency does not improve, and competitiveness does not develop. According to the Federation of Finnish Enterprises' SME barometer, 45% of SMEs are planning investments in the next 12 months. As an entrepreneur, I have learned that the choice of investment financing form has a significant impact on both cash flow and taxation.
What Is Investment Financing?
Investment financing refers to financing forms used by a company to acquire long-lived assets: machinery, equipment, vehicles, software, or premises. The goal is to spread the acquisition cost over a longer period so that the full amount does not burden cash flow at once.
SME investments grew by 3.5% in 2025 according to Statistics Finland. At the same time, the range of financing options has broadened – alongside the traditional bank loan, leasing, hire purchase, and various Finnvera products have emerged.
Forms of Investment Financing
Leasing – Right of Use Without Ownership
In leasing, the finance company purchases the asset and leases it to the company. The company pays a monthly leasing fee that includes principal and interest. At the end of the contract period, the asset is returned, purchased, or exchanged for a new one. Finance leasing and operating leasing differ in their balance sheet treatment.
Advantages of leasing:
- Does not tie up capital – balance sheet stays light (operating lease)
- Payments are fully tax-deductible expenses
- Technology updates automatically at contract renewal
- No separate collateral needed – the asset serves as collateral
- Predictable fixed monthly payments facilitate budgeting
Hire Purchase – Ownership from the Start
In hire purchase financing, the company pays for the investment in agreed instalments, and ownership transfers to the buyer at the latest after the final instalment, or even at the start of the agreement. Hire purchase is particularly suited to investments where ownership of the asset is important or where the asset retains its value for a long time.
Working Capital Financing Service
Explore working capital financing options
Bank Loan for Investment
A traditional bank loan is often the most affordable option for larger investments. The interest rate is typically 3–6% p.a. and the loan period 3–15 years. A bank loan usually requires collateral: a floating charge, mortgage, or personal guarantee. A Finnvera guarantee covers the missing collateral portion.
Finnvera Guarantee and Loan
Finnvera is a state-owned specialised financier that complements the financial market. Finnvera guaranteed SME investment loans to the tune of EUR 800 million in 2025. The SME guarantee typically covers 50–80% of the loan amount, and the guarantee premium is 0.75–2.0% p.a.
ELY Centre development grants typically cover 20–35% of the total investment cost. Grants can be applied for machinery, equipment, and software investments as well as premises projects. It is advisable to begin the grant application before making the investment decision.
Investment Profitability Calculation
Every investment must be carefully calculated before the financing decision. In my own business, I use three basic metrics: ROI (return on investment), payback period, and net present value.
Example: Machinery investment EUR 100,000 Annual additional revenue: EUR 35,000 Annual operating costs: EUR 5,000 Net income per year: EUR 30,000 ROI: (30,000 / 100,000) x 100 = 30% Payback period: 100,000 / 30,000 = 3.3 years The investment is profitable if the required return is below 30% and the acceptable payback period is over 3.3 years.
Financing Form Selection Guide
Choosing the right financing form depends on several factors. I have compiled a decision tree to help with the selection.
Choose the financing form as follows:
- Technology depreciates rapidly (< 5 years) -> Leasing
- Ownership is important (real estate, land) -> Bank loan or hire purchase
- Insufficient collateral -> Finnvera guarantee + bank loan
- Investment is R&D in nature -> Business Finland grant + own financing
- Investment is under EUR 50,000 -> Hire purchase or working capital financing
- Diversification – larger investments are worth financing from multiple sources
Tax Effects of Investment Financing
The financing form of an investment significantly affects taxation. Leasing payments are deducted in their entirety as expenses. In hire purchase and bank loans, the asset is capitalised on the balance sheet and depreciated according to a planned schedule. Interest expenses are deductible, but interest deduction limitations may apply to large interest expenses.
Tax effects by financing form:
- Leasing: The entire leasing payment is a tax-deductible expense
- Hire purchase: Depreciation on balance sheet value + interest expenses deductible
- Bank loan: Depreciation + interest deductible
- ELY grant: The grant is not taxable income but reduces the depreciation base
Practical Tips for Investment Financing
Remember these:
- Request quotes from at least three financiers
- Calculate the total cost over the entire contract period – don't just compare monthly payments
- Explore the possibility of an ELY grant before making the investment decision
- Consider the investment's impact on working capital needs
- Prepare a cash flow forecast to support the investment plan
- Negotiate the payment schedule with the supplier – partial financing may be possible
"Choosing the financing form for an investment is just as important a decision as the investment decision itself. The wrong financing form can turn a profitable investment into a cash flow problem."
Summary
Choosing investment financing is a strategic decision that affects the company's cash flow, balance sheet, and taxation for years. Leasing suits rapidly depreciating technology, hire purchase suits investments where ownership is important, and bank loans suit larger projects. Finnvera guarantees and ELY grants facilitate obtaining financing and reduce costs.
📌 Summary
Investment financing options include leasing (monthly rent, light balance sheet), hire purchase (ownership, deductible interest), bank loan (most affordable interest, requires collateral), and Finnvera-guaranteed loan (eases collateral shortfall). Always calculate the investment's ROI and payback period before making a decision.
Financing Business Growth
Comprehensive guide to growth financing options
Working Capital Financing vs. Bank Loan
Which suits your company better?
