Finance Lease vs Operating Lease

A Simple Guide to Key Differences

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

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.


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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.

Matt Whiteman

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