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Finance Lease vs Operating Lease

There are multiple options available for an organisation when looking to procure IT equipment. Two of the most common financing options are a finance lease and an operating lease. Here we look at some of the key differences between the two.

Finance lease vs operating lease

Finance lease vs operating lease

Leasing is important within many areas of the business as it doesn’t require large initial investments. It’s also beneficial for businesses in terms of cash flow, flexibility, convenience and scalability.

A leasing contract is an agreement in which a business has the right to use equipment in return for regular payments over a particular length of time. Finance lease and operating lease are the two accounting methods for leasing equipment and are used for different purposes.

What is a finance lease?

A finance lease is typically a full pay-out agreement; this means that the sum of the rentals includes the full capital cost of the equipment, plus the interest
accrued. A finance lease allows for the payments to be spread over the lease term, while also providing flexibility at the end of the contract. This kind of contract usually extends over a long period of time in which the user of the equipment has to maintain and take care of all the assets.

At the end of the lease, you can either, hand the equipment back and upgrade to the latest technology. Extend the lease period for continued use of the current equipment. Finally, ownership options may be available once the lease has been terminated, at the end of the minimum lease term. 

What is an operating lease?

An operating lease is a contract that involves periodical payments for the use of equipment which remain in ownership of the lessor (original owner of the equipment).

These contracts are usually short term, and it is up to the lessor to maintain the equipment throughout the period of payments. There are no purchasing options with an operating lease, so the lessee will never be able to own the equipment.

 

Finance lease vs operating lease

  • All maintenance must be carried out by the lessee with a financial lease, whereas with an operating lease, the lessor will take care of all running costs and maintenance.
  • At the end of a finance lease, the lessee may have the option to purchase the equipment for a final one-off payment. Conversely, you must return the equipment after an operating lease.
  • With a finance lease, the equipment is included as an asset to the lessee, whereas an operating lease is classed as an expense.
  • A financial lease generally covers a longer period of time than an operating lease.

 

Which lease is best for my business?

The best type of lease for your business will depend on your particular situation. An operating lease is good for businesses that would rather not deal with the maintenance or administration required with some equipment. Operating leases are usually the more efficient option for businesses who don’t want their assets to showcase under an accounting record.

Financial leases, on the other hand, are good for those who want to buy equipment without a large upfront cost.

Here at CHG-MERIDIAN, we offer finance leases for long life assets as well as a flexible operating lease. If you would like to find out more about our leasing options and services, please don’t hesitate to get in touch.

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