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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4433
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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What are the advantages and what are the disadvantages of operating

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What are the advantages and what are the disadvantages of operating and capital leases?
Why would a company pick one over the other?

Dear Friend,

 

A capital lease is usually used to finance equipment for the major part of its useful life, and there is a reasonable assurance that the lessee will obtain ownership of the equipment by the end of the lease term.

 

An operating lease usually finances equipment for less than its useful life, and at the end of the lease term the lessee can return the equipment to the lessor without further obligation.

 

Both of these methods has its own benefits and disadvantages.

 

Capital leases are used for long-term leases and for items that not become technologically obsolete, such as many kinds of machinery. Also, Capital leases give the lessee the benefits and drawbacks of ownership, so they are considered as assets, and they may be depreciated and these leases are considered as debts.

 

On the other hand, Operating leases, sometimes called service leases are used for shot-term leasing and often for assets that are high-tech or in which the technology changes often, like computer and office equipment.The lessee uses the property but does not take on the benefits or drawbacks of ownership, which are retained by the lessor and The rental cost of an operating lease is considered an operating expense.

 

The selection of company over operating lease or capital lease depends upon number of factors, especially the type of equipment it requires. If you are leasing a high-technology piece of equipment, you will probably have an operating lease. On the other hand, if you need a equipment, while will not get technologically obsolete, you would go for capital lease instead of operating lease as you will have the benefit of owning it later.

 

I am sure this would help...

Warm Regards,

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