Asset leasing offers unique alternatives to traditional financing for companies to obtain the necessary equipment for their operations. Assets are leased either as operating leases or as capital leases. Each option has its own impact on the company’s balance sheet, but both provide a company with additional options to fund assets needed to expand its business, simplify processes, and generate revenue. As a rule, financing with a leasing contract is much easier and faster to accomplish than traditional loan financing through a bank.
Operating leases are agreements on the use of assets and do not grant ownership rights to the company. Operating leases are most similar to car or home leases, where the lease payments are made for a specified term described in the agreement. The company doesn’t list the equipment as an asset on its balance sheet, just as a tenant can’t list their apartment as their own property.
The benefits of an operating lease are that it allows companies to save money on maintenance costs, purchase new equipment after the term ends, and use assets for projects they normally can’t do. For example, a real estate company may use a two-year operating lease for copiers. At the end of the term, the company would not have to worry about the remarketing and sale of the used copiers, they can simply be exchanged for new machines. This also avoids the need to increase maintenance costs as the equipment ages, as sometimes maintenance/warranty costs can be included in the lease payments.
Using an operating lease can help a small or new business get what it takes to take on larger projects and hopefully increase revenue. A construction company may choose this to get a bid for a large contract, rather than potentially spending tens of thousands of dollars on heavy equipment that can only be used for that particular project. A company could use a short-term lease (perhaps a year) for the equipment needed to complete the work, while paying only a portion of the cost of these machines.
Capital leases are sometimes referred to as finance leases because they give a company the same ownership rights as financing with a traditional bank loan. The equipment obtained through the lease is recognized as an asset of the company and the lease balance is reported as a liability. A major advantage of capital leases is that they are easier to obtain than traditional loans and have a variety of payment options. This allows small or start-up companies that have little to no credit to obtain financing that may not be available to them with traditional means and flexibility in repayment options. Apart from their accounting on the balance sheet, capital leases differ from operating leases in that they usually have longer lease terms.
Capital leases allow companies with weak or no loans to build their business loans while acquiring assets needed to expand operations and increase revenue. At the end of the lease term, the company would have ownership rights in tangible assets that could continue to be used or sold by the company to win cash.
These leases may include special financing options to help companies acquire assets needed to generate revenue while keeping overall costs and expenses low. Financing programs, such as deferred for 90 days or 90 days such as cash, give a company the opportunity to use equipment and generate revenue for three months before lease payments begin; or an alternative option to buy the equipment directly and avoid financing costs when capital becomes available.
Another funding option is to use residual amounts or balloon payments that end upe of the lease term are due for the entity to own the asset. The residual option allows for lower monthly payments for the lease term, making the asset more affordable and thus postponing full payment costs/interest expenses to a later date.
It’s not uncommon to have an almost customizable payment option for a capital lease. These options are used for certain industries where there may be large fluctuations in sales over the course of a year, such as seasonal businesses. These options can allow for lower or even no payment during a season’s downtime and the continuation of regular amounts from a certain time of year.
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Wendy is now a financial analyst and writer. Wendy has been writing about finance and personal finance since she was a sophomore in high school. She has also been writing for several online publications and published in The Huffington Post, and Forbes Woman.
Wendy is a credentialed financial analyst and has experience working with financial institutions and businesses. Wendy is also a certified financial planner. When Wendy's not writing, she enjoys tending to her many plants, watching TV, and spending time with her family.
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