What is a finance lease?

A finance lease is a type of commercial lease in which the legal owner of the asset — in this case, a tractor — rents the asset to the user of the tractor for an agreed-upon period. When a lessee enters into this agreement, they have full operating control of the asset. They will have responsibility and assume the risks and rewards that come with owning the asset. For accounting purposes, the lease gives the lessee the same economic characteristics as if they had full ownership of the tractor. The lessee will record the asset as a fixed asset on their balance sheet. In this situation, the lessee will record the interest of the lease payment as an expense. The lesser charges rent in exchange for lending the asset. The lessor retains ownership of the asset but the lessee gains exclusive use of the asset (providing they abide by the terms of the lease). The lessee is obliged to make rental payments that cover the original cost of the asset. There is an obligation to pay all of the fixed rental amounts, sometimes including a percentage of the purchase price of the vehicle at the end of the contract.

What is an operating lease?

An operating lease in contrast is the simplest form of equipment leasing, where the customer doesn't take on the risks and rewards that come with owning the asset (such as maintenance costs). An operating lease or contract hire is a way of renting an asset for your business over a short or medium time frame without taking on any risk. With an operating lease, you can get a tractor hire over a fixed term, with lower monthly payments and without the commitment of ownership.

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Raising enough capital to purchase inventory and kickstart operations is one of the biggest challenges new business owners face. Established businesses can also face cash flow problems, for instance during seasonal dips or in times of economic uncertainty — such as the one we all find ourselves in today. Fortunately, there are a few business finance options out there that may be able to help.

24 Nov 2020

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Disclaimer: Funding Options helps UK firms access business finance, working directly with businesses and their trusted advisors. We are a credit broker and do not provide loans ourselves. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. We are also able to make insurance introductions. Funding Options may receive a commission or finder’s fee for effecting such finance and insurance introductions.

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Editorial Team

Editorial Team

Blog articles

How to pay an international invoice

What are limited company mortgages?

How to start a business with a cash advance

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