Operating Lease vs Capital Lease

Main differences between Operating Lease and Capital Lease


Operating lease Financial or Capital lease
The asset belongs to the fund (lessor), not to the lessee; therefore, the lessee does not capitalize, nor depreciate the asset and the asset is considered off-balance. The financial company is the legal owner of the asset, however, the lessee includes the asset in his balance sheet, depreciates the assets and assumes benefits and risks of the ownership.
Banks may not offer operating leases, and therefore, an Operating Lease does not occupy the lessee’s line of credit. Only financial institutions may offer this credit facility; therefore, all lease transactions are supervised and registered to occupy the lessee’s line of credit.
Operating Leases do not result in assets or liabilities being recorded on the lessee's balance sheet, which can improve the lessee's financial ratios. Assets are always registered and liabilities recorded on the lessee's balance sheet, this increase increases the firms leverage and reduces its ROA.
The operating lease is a rental agreement, not a loan. Treated as a loan.
During the lease contract, less than 90% of the asset is paid for, which reduces the monthly lease payment. During the lease contract, 100% of the asset is paid for.
100% of the monthly lease payment is used as a tax shield. Expenses for tax shield are allocated between interest expense and asset depreciation.
Reduces the risk of retaining obsolescent machinery, making it easier for the lessee to have an updated fleet. Higher risk for the lessee of maintaining obsolescent machinery.
With an updated fleet, lessee’s benefit from higher reliability and lower maintenance costs. Older assets are associated with higher maintenance costs and less efficiency.
The dealer handles all maintenance and repairs on equipment, leaving the lessee to focus on its core business. The lessee assumes the risks and costs of in-house maintenance and repairs on the equipment.
Each asset under management has access to corporate insurance rates and conditions provided for the fund’s portfolio. Individual insurance plans.