The finance sector is continually advancing and for businesses to progress in this sphere, it is essential to function according to the developments being made in this industry. Leasing has become a popular finance instrument in the modern age. More companies have started depending on it. Owing to this popularity and prevalence, a lot of Finance vs Operating lease myths and misconceptions are starting to rise to prominence which are preventing many new companies from entering the sphere of leasing.

When it comes to leasing, there are two main kinds of leases which are finance lease and operating lease. Before breaking the myths that surround these two types of leases, it is essential to understand their meaning.

What Is A Finance Lease?

A finance lease refers to a lease type that involves a finance company that becomes the legal owner of a financial asset until the lease lasts. After the duration of the lease is over, the lessor transfers the ownership of the asset to the lessee. Towards the end of the lease period, the lessee has the option to buy the asset at a lower price instead of paying the market price of the same.

What Is An Operating Lease?

An operating lease, as opposed to a financing lease, refers to a lease type in which a financial asset can be used without the transfer of the asset’s ownership rights. In other words, an operating lease allows an individual or a company to use assets for a limited time but does not transfer the ownership rights of the asset to the borrower.

When it comes to Finance vs Operating lease, in a financial lease, the ownership of the asset is transferred to the one borrowing the asset whereas, in an operating lease, the ownership remains with the borrower while the one borrowing gets permission to use the asset.

Operating Lease vs Financial Lease

There are differences between an operating lease and a financial lease which are as follows.

1. In an operating lease, the borrower can use the asset for a limited period which is why if there are any risks and rewards involved, it will be limited to the lessor exclusively but this is not the case in a finance lease. In a finance lease, the ownership is sent to the borrower and therefore, the risks and rewards involved will belong to them.
2. The risk of cancellation is also present in the lease. When it comes to financial lease, the lease cannot be cancelled by any of the parties be it the lessor or the lessee whereas when it comes to operating lease, the lessor can cancel the lease of an asset and release it to someone else.
3. When it comes to leasing, the risk of obsolescence must be taken into account as well. In a financial lease, the obsolescence risk is taken by the lessee whereas, in an operating lease, the risk of obsolescence is taken by the lessor.
4. The lessor’s role in a financial lease is limited to a financier and he or she will not be responsible for any maintenance costs or repair costs but the lessor will take care of the operating or maintenance costs in the operating lease.
5. The lessor also pays the complete payout in the context of financial lease which is not the case in terms of operating lease where the lessor refrains from paying any amount of payout.

Whether it is Aircraft financing or any other financing, these are some factors that differentiate a financial lease from an operating lease.

5 Myths And Misconceptions About Finance Vs Operating Lease

Due to the growth in the use of both operating lease and financial lease, there has been a growth in the myths and misconceptions surrounding them as well. However, believing in these myths can prevent your growth. Hence, you must steer away from the following misconceptions of a lease.

1. Leasing does not involve ownership: Many people are led to believe that leasing does not enable you to have ownership over the asset you are leasing. However, if you are leasing an asset under a financial lease, the ownership of the asset will be transferred to you whereas under an operating lease, you can use the asset but the ownership rights will remain with the lessor.
2. A lease cannot be cancelled: Another famous misconception about the lease is that the Equipment lease agreement will not allow you to cancel the lease. However, it depends on the lease you have opted for. If you are leasing the asset under a financial lease, the lease cannot be cancelled whereas, the lease is cancellable in an operating lease.
3. Getting a lease is complex and challenging: Getting a lease is often considered to be challenging but you need to bust this myth because you have two options to get a lease. If you want the lease with ownership, you can opt for a financial lease whereas if you want to use the asset but do not want the ownership, you can opt for an operating lease.
4. Getting a lease is expensive: There is no fixed price attached to getting a lease. Depending on the kind of lease you want to opt for and also the period you want to borrow the asset for, the price of the lease may differ. Nonetheless, getting a lease is not expensive at all. You can get it at a reasonable rate. You can use an Equipment lease calculator to find out the price of the lease.
5. Leasing involves operational costs: In a financial lease, the entire ownership will be transferred to you so the operational costs have to be managed by you but since the ownership lies with the lessor in an operational lease, the operational costs will be managed by the lessor.

These are some of the myths related to financing leases and operating leases you should stay away from if you want to progress. Find the right Equipment leasing companies who can guide you with the process effectively.