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Difference Between Finance Lease vs Operating Lease

Published on Jul 13, 2022Updated on Jan 19, 2024

Difference Between Finance Lease vs Operating Lease

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. 

What is a Finance 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.

What is an Operating Lease?

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

Comparison Between Operating vs Finance Leases

 

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 75 Lakhs* 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

Highlights of SMFG India Credit Business Loan:

  1. Loan Amount: SMFG India Credit’s business loan amount can go as high as INR 75 Lakhs* and the repayment tenure is flexible upto 48 months*. Our business loan interest rates are affordable and are offered to eligible applicants depending on certain factors like location, income, business experience, current loans, credit score & history, etc. SMFG India Credit provides quick decisioning in the processing of business loan applications, thereby helping you in planning your finances better. 
  2. Business Loan Online: Online application is the best way to apply. Just click on the “Apply now” button on this page, and select “Business loans”. You then follow the self-explanatory steps.  Our SMFG India Credit representative will get in touch with you to take the process ahead. Alternatively, you can visit your nearest branch.
  3. Business Loan Calculator: This is a highly useful online tool offered by SMFG India Credit. With our business loan EMI calculator, you get an estimated loan amount that you could be eligible for. With the EMI calculator, you can select a suitable tenure based on the resulting EMI amount. 
  4. Documents Required for Business Loan: SMFG India Credit business loan documentation is simple. You need to submit your PAN & identity proof, address proof (business and residence), bank statements, income statements, balance sheet, profit and loss statements, ITR for the past two years, and proof of business existence. Depending on your profile and our SMFG India Credit policy at the time of loan application, additional documents may be requested.

*Terms and conditions apply. Loans are provided at the discretion of SMFG India Credit. 

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us

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