Here are some notes on operating leases in equipment leasing/lease financing in detail:
- Operating leases are a type of lease that is not treated as a loan for accounting purposes. This means that the lessee does not capitalize the lease on their balance sheet and does not amortize the lease payments over the lease term.
- The lessee in an operating lease is essentially renting the equipment from the lessor. The lease payments are the rental payments, plus any maintenance and insurance costs.
- At the end of the lease term, the lessee does not have the option to purchase the equipment. The equipment reverts to the lessor.
- Operating leases are typically used for equipment that is not essential to the lessee’s business. This is because operating leases are less expensive than finance leases, and they do not provide the lessee with the same financial benefits as purchasing the equipment outright.
- Here are some of the advantages of operating leases:
- The lessee can obtain the use of the equipment without having to make a large upfront investment.
- The lessee can spread the cost of the equipment over the lease term.
- The lessee does not have to be responsible for maintenance and insurance on the equipment.
- Here are some of the disadvantages of operating leases:
- The lessee will have to make lease payments for the entire lease term, even if the equipment is no longer needed.
- The lessee may not be able to use the equipment as much as they would like.
- The lessee may not be able to sell the equipment at the end of the lease term.