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operating leases or financing leases

Operating Lease or Finance Lease?

For your fleet

One consistent theme we have seen during the COVID pandemic is more and more businesses turning to leasing vehicles rather than owning them, with most choosing operating leases over finance leases as a way to lower their costs, stabilise their cashflow and reduce their risk.

What about your business? How do you know if an operating lease is better than a finance lease when it comes to securing cars for your business fleet?

There are benefits with both operating and finance leases and one may work better than the other for you. The right choice will depend on a variety of factors.

Operating lease

An operating lease works similar to a rental agreement in that you only pay for use of the vehicle, and it can free up capital that may otherwise be tied up with asset ownership.

This provides a bigger return on your investments because the working capital is maintained in the business.
Tax benefits may be gained from this type of lease as the rental price is tax deductible where the cars are used to generate taxable income.

Another benefit is that the car is simply returned at the end of the lease. There are no resale value risks when the lease runs out.

Budgeting is easier as you only have to allow for a pre agreed cost – there are no hidden maintenance issues to deal with.

Finance lease

Under a finance lease, vehicles are purchased by the lessor and leased to the lessee. The lessee pays monthly rental payments.

Once the term of the lease is up, the lessee has the the risk of ensuring that the residual value is paid to the lessor.

The benefits of this type of lease might be that payments are sometimes completely tax deductible (but this depends on the tax status and circumstances of your business).

The decision

Still not sure? Ask an expert. LeasePlan is happy to compare some numbers for you and help you make a choice. Ask us how.

You’ll also find more information about vehicle management on our website.

 

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