A major leasing benefit is the lessor’s ability to meet specific needs through lease structuring. Common lease structures include:
A capital lease is usually long-term and non-cancellable and is used to lease equipment that the company wants to use in the long term or purchase at the end of the lease period. In this lease, the lessee is responsible for maintaining the asset and paying any insurance and taxes associated with the equipment. The equipment’s assets and liabilities are recorded in the lessee’s balance sheet during the lease period. Businesses prefer this type of lease when renting expensive capital equipment that they may not have the funds to purchase immediately.
An operating lease is usually short-term and cancellable before the expiry of the lease period. It is common for businesses that want to use the equipment for a short period or replace the equipment at the end of the lease. The lessor retains ownership of the equipment and bears the risk of obsolescence. A lessee can cancel the equipment lease agreement, with prior notice, at any time before the expiry of the lease period, but usually with a penalty.
Apart from the two types of leases mentioned above, there are other types of equipment leases that combine the features of capital and operating leases to meet the needs of both parties. For example, the lessor may opt for a hybrid equipment lease for tax and financial advantages. Leveraged leases allow the lessee to finance the lease cost by issuing debt and equity against the equipment lease payments.« Back to Glossary Index