Finance lease vs operating lease – two practical choices to help your business money go further
Many businesses in the UK need costly items like cars, vans, or machinery to create their products or provide services. Buying these expensive items can cause cash flow problems, especially for businesses with seasonal income. The good news is that finance and operating leases offer two affordable ways for businesses to get the essential tools they need with asset finance.
What is a finance lease?
A finance lease is a way for businesses to use expensive items through a long-term rental agreement. The finance company (also called the lessor) owns the items, while the business (the lessee) pays to use them. At the end of the rental period, the business has the option to buy the items.
How does a finance lease work?
A finance lease lets your business use an expensive item for a certain period at a fixed monthly rental cost. When the agreement ends, your business can buy the item for a previously agreed amount. Finance leases make it easier for businesses to afford expensive items by spreading the cost over time and offering lower monthly payments than buying the item outright. In many cases (except for company cars), businesses can get back 100% of the VAT (a type of tax) on the monthly cost, including any service and maintenance fees.
What is an operating lease?
An operating lease is another way for businesses to use expensive items through a long-term asset finance agreement. The finance company (the lessor) owns the items, while the business (the lessee) pays to use them. However, unlike a finance lease, the business doesn’t have the option to buy the items when the rental period ends.
How does an operating lease work?
Operating leases offer businesses a low-cost way to get the expensive items they need. The business rents the item without the option to buy it when the rental period ends.
In many cases (especially for business vehicles), the rental agreement includes a Residual Value, which is an estimate of the item’s value at the end of the rental period. When the agreement ends, the finance company usually sells the item to someone else. If the item sells for more than the Residual Value, the finance company gives some of the extra money back to the business. If it sells for less, the business must pay the difference to the finance company.
Operating leases often have lower monthly costs than buying an item with hire purchase and may include maintenance and repairs. In most cases (except for company cars), businesses can get back up to 100% of the VAT on the monthly cost, including any maintenance or service fees.
Finance Lease vs Operating Lease – What’s the difference between the two?
Operating leases usually have better tax benefits and lower monthly payments, and they require a smaller deposit compared to finance leases.
Which one is best for my business?
The best choice depends on your business’s willingness to take risks, tax situation, and long-term financial goals.
An operating lease is a good choice for businesses that don’t want to deal with maintaining or managing items and want a more tax-friendly option that doesn’t include the items in accounting records. A finance lease is better for businesses that want to eventually own the items without a big upfront cost, and with lower monthly payments and more tax benefits than a standard hire purchase agreement.
How First Oak Capital can help
Finding the best finance or operating lease for your business can be difficult, with many rules, options, and tax issues to consider. Instead of searching and applying to many different lenders, it’s easier to work with a broker who can find finance and operating leases from a wide range of lenders for you. This saves you time and effort, as there’s no need for cold calls or endless requests for information. Even if you’ve been turned down elsewhere or have bad credit, just let us know what you need, and we’ll handle the rest.
How do I get started?
Register with First Oak Capital to find the best rates, the best terms, and the best operating leases for all your business needs. By working with us, you can secure the right asset finance option for your business, whether it’s a finance lease or an operating lease, ensuring your business has the essential tools to grow and succeed.
- Preserve cash flow: Leasing allows businesses to obtain essential equipment without a significant upfront cost, helping to maintain cash flow and reserve capital for other business needs.
- Fixed monthly payments: Leasing agreements typically have fixed monthly payments, making it easier for businesses to budget and manage their finances.
- Tax advantages: Depending on the type of lease and your specific business situation, lease payments may be tax-deductible as a business expense, reducing your overall tax liability.
- Access to the latest technology: Leasing enables businesses to acquire the most up-to-date equipment and technology, ensuring they remain competitive in the market.
- Avoid obsolescence: Since leased assets can be returned or replaced at the end of the lease term, businesses can avoid holding onto outdated equipment.
- Flexibility: Leasing offers a variety of options, such as different lease terms, end-of-lease options, and the ability to upgrade equipment during the lease period, providing flexibility to meet changing business needs.
- Easier approval process: The approval process for leasing is often simpler and quicker than obtaining a traditional loan for equipment purchases, making it an accessible financing option for many businesses.
- Off-balance sheet financing: In some cases, operating leases can be treated as off-balance sheet financing, which means the leased assets and associated liabilities do not appear on the company’s balance sheet. This can improve financial ratios and make the company more attractive to investors and lenders.
- Maintenance and support: Operating leases often include maintenance and support services, relieving the business of the responsibility and cost of maintaining the leased assets.
- Better asset management: Leasing allows businesses to acquire the necessary equipment without the long-term commitment and costs associated with ownership. This can lead to more efficient use of resources and better overall asset management.
Q: Finance Lease vs Operating Lease – What is the main difference between a finance lease and an operating lease?
A: The primary difference between a finance lease and an operating lease is the option to purchase the asset at the end of the lease term. With a finance lease, the lessee has the option to buy the asset, whereas with an operating lease, the lessee does not have that option.
Q: Can I claim tax benefits on both finance and operating leases?
A: Yes, both finance and operating leases offer tax benefits. However, the tax advantages may vary depending on the type of lease and your specific business situation. Consult with a tax professional to understand the specific tax implications for your business.
Q: How do I choose between a finance lease and an operating lease?
A: The best choice depends on your business’s risk tolerance, tax position, and long-term financial goals. Consider factors such as whether you want to own the asset eventually, your preference for handling maintenance, and your desire for tax advantages when making your decision.
Q: Are there any hidden fees or charges in finance and operating leases?
A: Both types of leases should clearly outline all fees and charges in the lease agreement. Make sure to read the terms and conditions carefully and clarify any doubts with the finance company before signing the contract.
Q: Can I terminate a finance lease or an operating lease early?
A: Early termination terms depend on the specific lease agreement. There may be penalties or fees associated with early termination, so it is essential to understand these terms before entering into a lease agreement.
Q: What happens if the asset gets damaged during the lease period?
A: Responsibility for damage to the asset depends on the terms of the lease agreement. Generally, the lessee is responsible for maintaining the asset and ensuring it remains in good condition. Check your lease agreement for specific terms related to damages and repairs.
Q: Can I modify or upgrade the asset during the lease period?
A: Whether you can modify or upgrade the asset during the lease period depends on the lease agreement’s terms. Some agreements may allow modifications or upgrades, while others may not. Always consult with the finance company before making any changes to the leased asset.
Q: Are maintenance and repairs included in finance and operating leases?
A: Maintenance and repair terms vary between finance and operating leases. Operating leases often include maintenance and repairs, while finance leases typically do not. However, this can differ depending on the specific lease agreement, so always check the terms and conditions.
Q: Can I negotiate the terms of a finance lease or an operating lease?
A: Yes, you can negotiate the terms of a finance or operating lease, such as the lease term, monthly payments, and end-of-lease options. Working with a broker, like First Oak Capital, can help you find the best terms and rates from a range of lenders.
Q: How do I find the best finance or operating lease for my business?
A: To find the best finance or operating lease for your business, consider working with a broker like First Oak Capital. We can help you access a wide range of lease options from various lenders, ensuring you find the most suitable solution for your business needs.
Have Questions? Let’s Talk.
For further information regarding the different types of commercial finance we offer or if you have specific questions regarding your circumstances, please give our friendly team a call. We’re open Monday – Friday, 9.00-5pm. Or if you’re ready to get started, click the button below.
