Finance Lease vs Operating Lease

Find out about finance and operating leases to help you determine which is best for your business with Savvy.

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, updated on July 3rd, 2024       

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Finance leases: lease, try, buy

Finance leases are flexible leases for business that want the freedom to buy at the end of the lease or hand back vehicles or equipment depending on their needs. A finance lease gives you a set lease term with an option to purchase your equipment or vehicles with a simple residual payment. If your project is done or you need the latest and greatest equipment, a finance lease can also be renewed with new items and vehicles, so your business is always ahead of the competition.

Save with an operating lease

Operating leases are ideal for businesses that use “off-balance sheet” accounting and will only use equipment or vehicles for a set loan term. Operating leases also offset the insurance, registration, tyres, upkeep, maintenance, and other costs are included in the lease and a business is not required to pay for these costs after the fact. Operating leases also reduce the administrative burden for businesses compared to finance leases.

Pros and cons of operating vs finance leases

What are the advantages to each type of lease – and how you can pick the right one.

Finance lease Operating lease
Finance leases are ideal for longer-term equipment use that you are likely to purchase.
Operating leases are short-term leases for equipment you will stop using at the end of the term.
Obsolescence risk falls to the business.
Obsolescence risk falls to the lease provider.
Ownership transfers to the business at the end of a lease, provided they pay the residual.
Ownership always is in the hands of the lease provider.
Businesses can claim GST, depreciation, and interest paid on repayments. They can even get the instant asset write-off if they purchase the assets.
Business can claim interest paid on repayments. Often, this is claimed on your behalf and passed on as reduced repayments.
Businesses must pay for rego, insurance, maintenance, etc. themselves.
The maintenance and ancillary costs are included in the lease repayments.
There is a higher administration cost to finance lease, as it’s recorded and tracked in a business’ accounting system.
There is no regulatory requirement to track operating leases in business accounting.
It is extremely difficult to cancel a finance lease before the lease term is up.
An operating lease can be cancelled at any time.
A business can purchase the asset at the end of the leas e term.
A business will have to hand back the assets at the end of the lease.

Why choose Savvy?

Have more questions about operating or standard leases?

What types of assets or equipment can I lease?

You can lease any type of business-related equipment, whether it’s a performing or non-performing asset. These could be vehicles, IT equipment, POS systems, gym equipment, mining equipment, agricultural vehicles, and more.

Is there a term limit on a lease?

Yes; especially in operating leases. Operating leases are meant for short-term use compared with finance leases. This can depend on the equipment or asset your business is leasing. For a vehicle, a two-year operating lease may be common, while a five-year finance lease is equally common.

Can my business claim tax deductions on leases?

Yes, businesses may claim tax deductions on lease agreements. This comes in the form of claiming interest paid on your lease. In finance leases, you may also claim depreciation and GST on the purchase price (when you purchase the asset at the end of the lease.) If you do purchase the asset, you may be eligible for the instant asset write-off.

What if I change my mind half-way through a lease?

In an operating lease, you may cancel the lease – sometimes without a penalty. In a finance lease this is much more difficult. You will have to arrange with your lease holder in order to cancel the lease. Transferring lease types is difficult, as they operate under a contract.

Do I have to pay for maintenance with a finance or operating lease?

In a finance lease, you will be liable for maintenance, insurance, registration, training and other costs associated with your leased asset. In an operating lease, these costs are included within the lease agreement.

Can I customise the vehicle or equipment to my liking?

In some respects, yes. This is determined by what is applicable in your lease agreement. Usually, there are fewer restrictions under a finance lease. It may be difficult to customise your equipment under an operating lease, as your asset will need to be handed back to the lease agent.

What are lessees and lessors?

These are technical finance terms you might see in your contract. A lessee is the entity or individual leasing an asset; the lessor is the provider of the lease.

What is a residual value payment?

A residual value payment or “balloon” payment is a lump sum due at the end of a finance lease to purchase equipment or assets outright. This is the price of the equipment or vehicle that is “left to pay” and not covered by your lease repayments.

What is “off balance sheet accounting?"

Off balance sheet accounting is an accounting that has your business pay for the use of an asset through operating expenses instead of listing it as an asset. This can be complicated; ask your accountant or financial controller for more information.

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