Published on Jul 13, 2022Updated on Sept 23, 2026
Most businesses need to buy types of equipment and they need to regularly spend on their maintenance. Efficient machinery leads to the smooth functioning of operations. Investing in machinery can cause a strain on the company’s cash flow. Equipment leasing is a solution to this issue. A lease, in simple terms, is an agreement between an owner of an asset and the user of the same asset. The asset owner is referred to as a lessor and the user is lessee. The owner and user make a lease rental to agree upon the usage of the asset for a certain period for specific periodic payments. The terms and conditions are stated on a lease deed. A lease is an alternative to buying an asset out.
Let us understand the difference between a finance / capital lease and operating lease.
In finance lease, the lessor allows the lessee to use a certain asset for a fixed duration, without the transfer of title but with the transfer of risk and rewards. It is also known as a capital lease. The ownership of the asset is transferred to the lessee when the lease term expires. A finance lease lets the lessee have the asset purchase option at less than the fair market value of the asset. In a finance lease, the lessee can claim interest and depreciation as tax deductions. The finance lease is non-cancellable in nature.
In operating lease, the risks and rewards are not transferred to the lessee. It Is flexible in nature and can be canceled by the lessee or the lessor. Here, the title does not get transferred and lasts for a short duration. At the end of the operating lease, the asset remains with the lessor. An operating lease is treated like renting for accounting purposes. This means that the lease payments are treated as operating expenses In operating lease, the asset does not show on the balance sheet.
Must Read: 5 Income Tax-Saving Tips for Small Businesses
|
|
Finance Lease |
Operating Lease |
|
Definition |
An agreement in which the lessor allows the lessee to use an asset for the maximum part of its economic life against payment of rentals. |
An agreement in which the lessor allows the lessee to use an asset for a term smaller than the economic life of the asset against rental payment. |
|
Nature |
Loan Agreement |
Rental Agreement |
|
Lease Term |
The lease term here is long. |
The lease term here is short. |
|
Risk Taking for Obsolescence |
Risk taking is transferred to the lessee |
Risk taking remains with the lessor |
|
Cancellation of the Lease |
Only on the occurrence of certain events. |
Cancelation can be done anytime and hence it is highly flexible. |
|
Tax Benefit |
Depreciation and finance charges can be allowed as a deduction to lessee. |
Lease rent is allowed as a deduction to the lessee. |
|
Cost of Repairs and Maintenance |
To be borne by the lessee. |
To be borne by the lessor. |
|
Bargain Purchase Option |
The lease may have an option as per which the lessee can purchase the asset at the price less than the fair market value. |
No such option is available here. |
An unsecured business loan in India is a wonderful option to buy or lease new equipment or machinery or set up a factory. SMFG India Credit offers extremely easy business loan solutions with minimal documentation. The processing is smooth and the business loan amount can be used for any business related expense. You could fund your lease with SMFG India Credit’s business loan. SMFG India Credit offers business loans that are collateral-free upto INR 1 Crore* to eligible applicants. You can enjoy attractive interest rates, flexible repayment tenure, and smooth documentation.
Must Read: Business Finance - Know its Meaning, Importance, Types & Sources
*Terms and conditions apply. Loans are provided at the discretion of SMFG India Credit.
Important Note: This article is for general informational purposes only and may be subject to change from time to time. As product features, eligibility criteria, interest rates, charges, fees, tenures and other terms may be revised as per SMFG India Credit's policies, readers are advised to refer to the latest details from the respective product pages (please select from the top menu). For the latest loan charges, please visit Charges & Fees Link and for the latest Interest rates, please visit Interest Rate Rationale. Please note that final loan terms, disbursement process and eligibility criteria will depend on SMFG India Credit's policies at the time of loan application.
The content of this article is for information purposes only and does not constitute as, an offer or advise to avail any products or services from, or, a commitment to grant any loan by the company. It is not intended to create any rights or obligations against us. All content is provided "as is" without any warranty of any kind, either express or implied & we disclaim any warranty or representation, whatsoever, in regards to the content. Please refer to the Privacy Policy of the company to understand the use, processing and storage of your personal data.
Was this helpful?
Insurance disclaimer SMICC is registered with the Insurance Regulatory and Development Authority of India (IRDAI) as a Corporate Agent. IRDAI Registration No.: [CA0098] CIN No. U65191TN1994PLC079235. The insurance policy is a contract between the customer and the insurance company, and policy is underwritten by insurance companies. SMICC acts only as the distributor and is not responsible for any risk, policy issuance, claim settlement/repudiation etc. Insurance is the subject matter of solicitation. Purchase of insurance is voluntary and subject to insurer underwriting and policy terms and conditions. Customers are advised to read the policy terms and conditions, benefits, exclusions, claim settlement carefully before purchase. Kindly note that “Insurance Products” are not mandatory for the purpose of the application and disbursement of loan. It shall be the sole discretion of the customer, by providing explicit consent, to avail such insurance along with the Loan.
Beware of Spurious calls/ Fraud phone calls IRDAI is not involved in activities like selling Insurance policies, announcing bonus or investment of premium. Public receiving such phone calls are requested to lodge a police complaint.
