What are the Different Types of Leases?


The type of lease you select should match your equipment needs, business goals and cash flow requirements.  For example, some lessees need one piece of equipment that requires a single contract.  Other companies may continually acquire equipment and exercise a master lease that allows them to acquire many items within a single lease and avoids executing a new contract with every acquisition.  The most common types of leases are operating leases and finance leases. 

• Operating Lease.  An operating lease is particularly attractive to companies that continually update or replace equipment.  They want to use equipment without ownership, but also want to return equipment at lease-end and avoid technological obsolescence.  An operating lease usually results in the lowest payment of any financing alternative and is an excellent strategy for bypassing capital budgeting restraints.  It is typically qualifies for off-balance sheet treatment and can result in improved Return On Asset (ROA) due to a lower asset base.  It can also result in higher reported earnings in the early years of the lease.

• Finance Lease.  A finance lease is a full-payout, non-cancelable agreement, in which the lessee is responsible for maintenance, taxes and insurance.  Finance leases are most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high.  These leases are structured as equipment financing agreements with residuals up to 10 percent.  The lessee purchases the equipment upon lease termination at a pre-agreed amount.  The term of a finance lease tends to be longer, nearly covering the useful life of the equipment.

The SBA has valuable lease information available here.