Finance Lease or Operating Lease: Which One Fits Your Business?
Leasing has become common practice. It is advantageous to both the small business owner and the person leasing out the property. The person who obtains the lease pays for the asset in smaller amounts, and the deal ends after the leasing period is completed. The owner also benefits from the property's value and may enjoy the relevant tax benefits.
There are two types of leasing, differentiated by the risks involved, the agreed leasing period and the number of beneficiaries from the deal.
Finance lease. Here the owner transfers all the risks and rewards of ownership to the person obtaining the lease. The lessee inherits both the asset and the liability associated with it, and virtually becomes the owner of the property. It has an indefinite period for recovery and can be followed by a secondary but shorter period allowing for full recovery.
Operating lease. The owner does not transfer the asset's risks as in the finance lease. It comes in the short term and is useful for as long as the purchase is viable, so the total investment may not be recovered during the period of the lease. It is also known as the service lease, and it covers repair and maintenance on the owner's side.
Specific alterations can be made in a lease to strengthen your cash position: a low down payment or none at all, extending the lease term to span the calculated viability of the asset, adding an option to buy the property when the lease ends, and adjusting payments to accommodate unforeseen seasonal changes.
The benefits of lease financing are certainty, since it is a medium-term facility that cannot be recanted unless payments are due; budgeting, because it keeps cash flow in check and predictable; fixed-rate finance with set repayment terms; security; and tax advantages through capital allowances, which the leasing company takes and passes on.