Operating Lease vs. Capital Lease: What's the Best Option?
📅 Published on 2024-03-15
Learn the key differences between an operating lease and a capital lease to make the best decision for your company.
Leasing is a widely used financing alternative for companies in different sectors. However, there are two main types: the operating lease and the capital lease. Each has specific advantages and uses depending on your business's needs.
What is an operating lease?
An operating lease is an option where a company rents an asset with no intention of buying it at the end of the contract. At the end of the lease period, the company can choose to renew the equipment, exchange it for a newer one, or return it without acquiring it.
This model is ideal for companies that require constant equipment renewal without assuming depreciation or maintenance costs.
What is a capital lease?
Unlike an operating lease, a capital lease allows the company to acquire the asset at the end of the contract by paying a residual value. It is a convenient option when you want to own the asset in the long term.
Companies that opt for a capital lease usually do so for assets with a long useful life or when the equipment will be used without the need for constant renewals.
Comparison between both models
| Feature | Operating Lease | Capital Lease |
|---|---|---|
| Asset Ownership | No | Yes, at the end of the contract |
| Tax Deduction | 100% deductible as an operating expense | The asset is depreciated |
| Flexibility | High, allows for constant renewal | Lower, it is a long-term purchase |
| Maintenance Cost | Usually included in the rent | Borne by the owner |
| Recommended Use | Rapidly evolving or short-lived equipment | Long-lasting machinery |
What is the best option for your company?
The choice between an operating and a capital lease will depend on your business's needs. If you are looking for flexibility, technological renewal, and tax benefits, the operating lease is the best option. On the other hand, if you need to acquire an asset for the long term, a capital lease will be more convenient.
Conclusion
Both models have significant advantages depending on each company's financial strategy. Before making a decision, it is advisable to analyze the liquidity needs, the type of asset, and the tax benefits that best suit your business's operation.