When your business needs essential equipment, financing can be a smart, cost-effective way to get it. Leasing, in particular, offers flexibility by allowing you to access high-value equipment without a large upfront cost. But not all leases work the same way. Understanding the different types is key to choosing the right fit for your business. The two most common options are finance leases and operating leases — each with its own advantages depending on your goals.
In this article, we’ll break down how leasing works, highlight the differences between finance and operating leases, and outline the key factors to consider when deciding which option is right for you.
What is the definition of leasing?
Leasing is a contract between a lessee (your business) and a lessor (the leasing company). Businesses use leasing to access equipment or property for a set period, making regular payments to the leasing company. This alternative to buying assets outright helps preserve cash flow for essential operations by avoiding large upfront costs.
What is a finance lease?
Under a finance lease, a business makes regular payments to secure an asset over a long term period. The business assumes most of the risks and rewards associated with ownership of the asset. They are responsible for maintaining it, insuring it, and covering any related costs.
Key features of a finance lease include:
Finance leases are particularly useful for businesses that need access to expensive equipment or vehicles, but may not have the capital to purchase them upfront. They are commonly used in industries where long term use of machinery or vehicles is essential.
What is an operating lease?
An operating lease, is a leasing arrangement in which the lessor retains most of the risks and rewards associated with owning the asset. The lessee (the business) simply pays for the use of the asset during the lease term and typically has no option or obligation to purchase the asset at the end of the lease.
Key features of an operating lease include:
Operating leases are popular in industries where technology changes rapidly, such as IT, or where equipment may become outdated quickly. They can be used by businesses in these industries as part of a strategy to stay ahead of competitors and provide the best services to their clients.
Choosing the best suited option for your business
Consider the following key points when choosing between a finance lease and an operating lease:
Duration of use
If your business needs the asset for a long period and wants to have the option to own it, a finance lease may be the better option. If your business only needs the asset temporarily or expects it to become out of date quickly, an operating lease may be more cost effective.
Ownership options
If your business might opt to keep the asset after the lease period, a finance lease gives that option. If not, an operating lease allows for flexibility without the long term commitment.
Maintenance and risks
Consider how much control your business needs over the asset. If your business can handle maintenance and wants more control over the asset, a finance lease may be the right choice. Otherwise, opt for an operating lease that offers the advantage of leaving most of these responsibilities with the lessor.
Both finance and operating leases have benefits Understanding the terms and implications of each will help you make an informed decision that aligns with and serves your business goals, financial situation, and long term plans.
Applying for a lease
If you’re considering leasing an asset for your business, you can explore a range of choices with Capitalise. With access to your business credit score and a network of over 100 UK lenders, we help you find funding that fits your needs.
Just sign up and search for funding to get started, or use our loan calculator to see how much you could borrow.