Finance Lease vs Operating Lease

A finance lease, 'financial lease' or 'capital 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 asset leasing period, you can hand the equipment back and upgrade to the latest technology, or 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 a capital lease? 

Capital lease is another name for a finance lease, and they are often used interchangeably, although finance lease is now considered the standard and correct terminology in accounting.

A finance lease agreement allows a business to spread out the cost of the machine by making fixed monthly payments over the agreed lease period.

The agreed contract repayments are based on the period of the lease and the value of the printer.

During the finance lease, the printer will not be owned by the lessee and will remain under the ownership of the leasing company until the end of the lease agreement.

However, the lessee is responsible for any maintenance or repairs required during the lease agreement and the printer will appear on the company balance sheet.

Due to the fixed-term nature, it is an expensive process to terminate a finance lease early before the agreed period is over.

There are a number of benefits of a finance lease. These benefits include better management of cash flow, no big upfront costs, tax advantages and the ability to access the assets quickly to minimise any business downtime.

With manageable monthly payments, it can be much easier to get visibility on where the rest of the budget can be spent. Financial lease payments are also often tax-deductible as a business expense.

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

These contracts are usually short-term, and it is up to the lessee 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.

An operating lease is usually combined with our Device as a Service (DaaS) solution (also known as Hardware as a Service - HaaS). DaaS is an innovative model that allows you to avoid the typical pain points of having major capital expenditures and long waits for an upgrade in assets.

This model provides access to the latest technology, remote working and the digital workplace. DaaS works by bundling the cost of the hardware and the cost of the lifecycle services into one single contract in the form of a monthly subscription. DaaS allows you to avoid costly cash purchases and keep your IT portfolio up to date with greater cost transparency.

An operating lease agreement is favoured by businesses that acquire equipment on a short-term basis. Only the right of use is transferred to the lessee under an operating lease and the asset remains under the ownership of the leasing company.

Maintenance and repairs to the machine under an operating lease are the responsibility of the leasing company – removing the risk of hidden fees for the lessee. At the end of the agreement, the equipment is returned.

Operating leases free up capital that would otherwise be invested in asset ownership and offers a return on investment.

Leasing an X-ray machine through an operating lease allows a business to rent the machine while they need it and for part of the asset's useful life.

• 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 with a final 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 than an operating lease.

The accounting treatment of a financial lease is recorded on the company balance sheet. Both leased assets and lease payable should be reported.

The record of the lease provides the lessee with ownership of the asset and obligates the company to pay future rental payments.

Lessees will have to prove their right to use an asset and their leasing liabilities to make lease repayment on the balance sheet.

The lessor should record the lease in the balance sheet as a receivable ‘at an amount equal to the net investment lease’.

An operational lease is recorded like the renting of an asset and lease payments are considered operational expenses.

However, the lessee still has an obligation to make the payments over the term of the contract.

For the lessee, lease payments should be recorded on the income statement while the lessor should recognise the leased asset in the balance sheet.

The best type of lease for your business will depend on your 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 that 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 flexible operating leases to businesses in the UK and across the globe. If you would like to find out more about our leasing options and services, please don’t hesitate to get in touch.