Efficient cash flow management is essential for firms requiring frequent machinery and equipment investments. Equipment leasing is a real solution. Leasing refers to a contract where the person owning the machinery, known as the lessor, agrees with a third-party user, known as the lessee, that they may use it over time, paying money in monthly installments. The lessee’s responsibilities are contained in a lease deed. Deciding to lease may be a good idea for anyone wanting to acquire equipment.
This post will delve into the differences between finance (or capital) leases and operating leases, helping businesses make informed decisions.
What is a Finance Lease?
A finance lease, also known as a capital lease, involves the lessor granting the lessee the use of an asset for most of its economic life. While the title is not transferred, the associated risks and rewards of ownership are as follows: Most times, at the lease period’s termination, the lessee can acquire the asset at a price lower than its market value. Therefore, the lessee can claim tax relief in terms of interest and depreciation. Usually, finance leases are also not cancellable.
What is an Operating Lease?
The lessee does not take on the risks and rewards in an operating lease. It is more like a rental for a limited time than ownership; both parties can terminate it whenever they want. After the expiry of a lease agreement, the lessor remains with the asset. This means that for accounting purposes, operating leases are recorded as an expense on the income statement, where the payment obligations under these arrangements are categorized into operating costs. The statement of financial position under the lessee’s financial statements does not portray the asset.
Finance Lease vs Operating Lease: A Comparative Overview
| Aspect | Finance Lease | Operating Lease |
| Nature | Similar to a loan agreement | Similar to a rental agreement |
| Lease Term | Long-term | Short-term |
| Risk of Obsolescence | Transferred to lessee | Remains with lessor |
| Cancellation | Possible under specific events | Highly flexible, can be canceled anytime |
| Tax Benefits | Lessee can claim depreciation and finance charges | Lease rent is deductible for the lessee |
| Maintenance Costs | Borne by lessee | Borne by lessor |
| Purchase Option | Often includes a bargain purchase option | No purchase option available |
Financing Your Lease with Ruloans
Ruloans provides an excellent avenue for unsecured business loans for businesses in India considering equipment leasing or purchase. Ruloans offers hassle-free business loan solutions with minimal documentation requirements. The process is streamlined, and the loan can be used for various business expenses, including funding your lease.
Key Features of Ruloans Business Loans:
- Competitive Interest Rates: Tailored to eligible applicants based on location, income, business experience, existing loans, credit score, and history.
- Quick Processing: Fast decision-making process, with potential approval within 72 hours*.
- Online Application: Easy application for business loans through the “Apply Now” feature.
- EMI Calculator: An online tool to estimate eligible loan amounts and manage EMIs effectively.
- Documentation: Simple documentation process requiring basic financial and identity proofs.
Applying for a Business Loan with Ruloans
If you want to apply for business loan online, it is straightforward – click the “Apply Now” button and follow the prompts. A Ruloans representative will assist you further. Alternatively, visit a Ruloans branch near you.
Conclusion
Businesses must consider their unique financial strategy and specific needs when selecting either a finance lease or an operating lease. Knowing these differences is crucial for making an appropriate decision concerning equipment financing. Ruloans can provide customizable financial packages that facilitate operational efficiency and grow businesses.
