Capital lease
A capital lease (or finance lease) is a type of lease. It is a commercial arrangement where:
- the lessee (customer or borrower) will select an asset (equipment, vehicle, software);
- the lessor (finance company) will purchase that asset;
- the lessee will have use of that asset during the lease;
- the lessee will pay a series of rentals or installments for the use of that asset;
- the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee;
- the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price);
The finance company is the legal owner of the asset during duration of the lease. However the lessee has control over the asset providing them the benefits and risks of (economic) ownership.
Under US accounting standards, a finance (capital) lease is a lease which meets at least one of the following criteria:
- ownership of the asset is transferred to the lessee at the end of the lease term;
- the lease contains a bargain purchase option to buy the equipment at less than fair market value;
- the lease term equals or exceeds 75% of the asset's estimated useful life;
- the present value of the lease payments equals or exceeds 90% of the total original cost of the equipment.
Operating lease
An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.
The lessor leases the equipment to the lessee which pays periodically a rent. Operating lease is the smartest way for the outsourcing of industrial equipment. It allows the company not to use its equity in a investment that produces no direct added value, but to dedicate it to its core business and valuation.
Unlike a Financial Lease or Finance lease, at the end of the operating lease the title to the asset does not pass to the lessee, but remains with the lessor. Accordingly, at the end of an operating lease, the lessee has several possibilities:
Lease
Leasing is a good way to lower the costs of a company.
- Pursuit of the lease
- Return of the equipment
- Renewal of equipment
- Restoration of equipment
- Purchase of equipment at their market value