Finance and Operating Lease

Q. What is Finance Lease?

A finance lease also referred to as a lease or business lease, it any suit those businesses who wish to have an off Balance Sheet style of funding. Lessee (user) is not the owner of the goods so the value of the goods will not be entered on his/her balance sheet so neither the contingent liability.

Key Features of a Finance Lease:

1. Flexible Terms: Lease can choose from terms of 1-5 years.

2. Fixed Residual: A residual may be compulsory; this residual is set by the lease provider.

3. Repayment Options: Lessee can choose to structure a repayment schedule that suits. This could be monthly, quarterly or Yearly.

Q. What is Operating Lease?

An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis.

Features/Advantages of Operating Lease:

1. No incidence of the rents on the balance sheet; they are operating expenses deductible from profits.

2. Improvement of cash-flow.

3. Economy of corporate taxes.