Whether it is for their fleet of vehicles, their IT equipment or industrial equipment, more and more companies, from SMEs to large groups, are now preferring lease financing to traditional financing.
Two main options are available: finance leases and operating leases.
But what is the difference? What are the advantages of these two solutions? Which one should you choose?
The option to buy: the big difference between finance leases and operating leases.
Finance leases and operating leases are fairly similar to each other. Both involve long-term leases for the use of costly equipment such as machine tools, IT equipment, vehicle fleets, etc.
The company will make lease payments over a number of months so that it can use the equipment, whatever it is. It therefore does not own it. It is a tripartite transaction between the company, the supplier and the financing company. The supplier bills the financing company, which collects the lease payments from the lessee, i.e. the company.
The big difference between operating leases and finances leases lies in the option to buy.
At the end of the contract, the company may, under a finance lease, acquire the equipment it has leased for a number of months. This is not the case for operating leases, where the lessee does not have any option to buy. At the end of the contract, the company can either return the equipment or extend the contract. The equipment can also be returned or passed on and replaced by more recent models.
What are the advantages of operating leases and finance leases?
Finance leases and operating leases both offer a number of accounting advantages.
1. You maintain your Cash Flow
Lease financing lets you maintain your cash flow, as your investment expenditure is spread over several months.
2. You retain your debt capacity
By opting for a finance lease or long-term lease to finance your equipment (machine tools, IT equipment, vehicle fleet, medical devices, etc.), you retain your debt capacity. You can therefore take out a bank loan for other strategic investments.
3. You reduce your corporate tax
Operating lease payments are shown in the income statement. They are considered expenses. They are therefore deductible from your income in the same way as the purchase of raw materials for production activity or your travel expenses.
This reduces your taxable amount. Although finance lease payments appear on the balance sheet, they do not unbalance it since they do not come under fixed assets. They are also tax-deductible..
Why should you prefer operating leases?
If you wish to acquire an asset, then a finance lease is, of course, more appropriate, since it includes an option to buy.
But an operating lease will meet your needs better in many other cases:
- if you want only to make use of the equipment and buying it is not the main aim (which may be the case, for example, for a vehicle fleet).
- if you use equipment that quickly becomes obsolete or will be used intensively and will need to be replaced after a few years (such as IT hardware, smartphones or mobile devices).
- if you wish to benefit from various related services. Operating lease payments generally include support for sourcing, maintenance, return and reconditioning of equipment, etc.
- if you wish to have equipment temporarily for a one-off deal.
- if you want some flexibilityin lease payments and adjustable monthly payments.
Operating leases are one of the cornerstones of the circular and non-linear economy.
Equipment is leased for as long as the company needs it, before having a second life and being refurbished, renovated and recycled.
It is therefore the best way to go if you have a CSR (corporate social responsibility) strategy, and preserving the planet is a priority for you and your company!
Olinn supports you in the management of your professional equipment!