The Difference Between Operating And Capital Leases

A lot of companies, in particular, SMEs, may find leasing a more flexible and affordable choice than traditional equipment financing avenues, such as bank loans to purchase equipment outright.

Capital and operating leases are the two main categories of equipment leases. Under the terms of a capital lease agreement, the lessee is responsible for the management of the asset and all related tax and insurance payments. A capital lease is the right choice for businesses looking to lease equipment long term with the aim of owning the equipment at the conclusion of the lease period.

In contrast, under the terms of an operating lease agreement, the lessor remains the owner of the leased equipment and is responsible for any tax, insurance, and other associated obligations. This form of agreement is ideal for businesses that want to use equipment in the short term and then replace it at the conclusion of the lease agreement, most commonly with a newer version.

Equipment Lease Types

With our calculator, you can choose from three of the most popular equipment lease types to calculate your payments.

• The $1 buyout lease, a capital lease, in which the lessee makes fixed payments each month and then has the right to purchase the leased equipment for $1 at the conclusion of the lease period.
• The 10% purchase lease, which is a combination of an operating and capital lease. It gives you the right to purchase the leased equipment for 10% of its price when the lease ends. This residual cost to be paid at the end of the lease means that the lessee will pay lower average monthly payments, making this a popular lease type.
• The fair market value lease, an operating lease also known as a ‘true’ lease, provides the lessee with a great deal of flexibility at the conclusion of the lease period. When the lease ends, the lessee can give the equipment back, renew the lease, or opt to buy the equipment for its market value. This option is popular among companies that use equipment that typically reduce in value very quickly.