Difference between finance lease and operating lease

In simple terms, asset finance provides the funding solution to enable the acquisition of a business asset or piece of equipment. Funding is secured on the asset and payments made on a monthly basis over a set period of time. Whilst this may sound simple there are actually many facets to asset finance.

Two key elements of asset finance are finance lease and operating lease. Let’s explore these options in more detail.

Finance Lease

Finance lease provides a solution where you rent a specific asset over a set period of time from a finance leasing company. It is very similar to a business acquiring the equipment directly and paying a monthly fee except the financial agreement and ownership is with the leasing company. The leasing company will acquire the machinery directly from the manufacturer and then lease it directly to the end user. At the end of the term the company can either outright purchase the machinery, return it back to the leasing company or look to take a new agreement for a new piece of equipment.

Key benefits of finance lease include:

• There is no large upfront cost
• The leasing company will purchase the asset
• The business benefits from the latest equipment and technology
• The business has exclusive use of the asset
• Outright purchase of the machinery can be completed at the end of the agreement

Operating Lease

An operating lease is very similar to a finance lease apart from the fact that not everything is controlled by the finance leasing company. The leasing contract is also normally shorter than the life expectancy of the asset. When the contract expires typically there will be some residual value left for the asset allowing a refinance deal to be arranged to pay off the agreed final payment or for the asset to be sold to recover the remaining value.

Key benefits of operating lease include:

• There is no large upfront cost
• The business benefits from the latest equipment and technology
• The business has exclusive use of the asset
• Outright purchase of the machinery can be completed at the end of the agreement
• Extra services such as service agreements and machine maintenance can be built in to the contract

The two key points to remember are:

1. If a business is looking for an asset that can be utilised on a long-term basis, then a finance lease is an ideal solution. The longer the duration it will be required for, the less value it will hold at the end of its term.
2. If a business needs the asset for a shorter period of time and before it exceeds it optimum operating period, then an operating lease would be the preferred option. The asset will be far more valuable at the end of its term.

If you have any questions or would like to find out more about finance lease or operating lease, please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.