When it comes to leasing assets for your business, there are two main types of leases to consider: financial leases and operating leases. While both types of leases allow you to use an asset in exchange for periodic payments, there are some key differences between them that you should be aware of.
A financial lease is a type of lease where the lessee (the business owner) assumes substantially all of the risks and rewards associated with ownership of the asset. This means that at the end of the lease term, you may have the option to purchase the asset at a reduced price or continue leasing it for a secondary period at a rent that is substantially lower than market rent¹. Financial leases are typically used for long-term leasing arrangements where you want to use an asset for most or all of its useful life.
On the other hand, an operating lease is a type of lease where the lessor (the owner of the asset) retains substantially all of the risks and rewards associated with ownership. This means that at the end of the lease term, you simply return the asset to its owner without any further obligations³. Operating leases are typically used for short-term leasing arrangements where you only need to use an asset temporarily.
The right type of lease for your business
So which type of lease is right for your business? It ultimately depends on your specific needs and circumstances. If you need long-term access to an asset and want more control over its use and maintenance, then a financial lease may be a good choice. If you only need temporary access to an asset or want more flexibility in terms of being able to return it at any time without penalty, then an operating lease may be more suitable.
In conclusion, both financial leases and operating leases have their advantages and disadvantages. It’s important to carefully consider your needs before deciding which type of lease is right for your business.
