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Capital vs Operating Leases – What You Need To Know.

Capital vs Operating Leases – What You Need To Know.

There are a multitude of ways to finance/lease or purchase equipment for your business and each different method has its own advantages and disadvantages. Rather than going into each and every method, this article is focusing on the two general financial merchandising products that break down into several sub-categories.

(1) Financial/Capital Leases and (2) Operating Leases.

Financial/Capital Leases:

Financial leasing or often times referred to as Capital Leasing, is one of the most common financial merchandising products that is used in the market today. Below are some of the features and benefits of choosing this particular financial merchandising option.

Features Financial/Capital Leasing:

  • Level Monthly Payments.
  • Depreciation and Interest Claimed by Lessee.
  • Any Ownership Tax Benefits can be Claimed by Lessee.
  • Payment of Lift Truck Over Time.
  • Allows the Purchase of Equipment without Large Outlay of Capital.
  • Maintenance Cannot be Included in the Lease Payment.
  • Lender Controls the Lease – Language can not change.
  • Standard Options: Full Payout, Balloon Payment, or $1 Option Buyout.

Benefits of Financial/Capital Leasing:

  • Fixed amount monthly payments aid in the cash flow and budgeting of your company’s equipment acquisition strategy and allow for planning future acquisitions before you absolutely need to purchase new equipment.
  • Asset is the property of the lessee which means your company can claim any deprecation or tax benefits. The Internal Revenue Service offers bonus depreciation for capital equipment acquisitions under Section 179. To learn more about Section 179 benefits visit here:
  • This method of equipment acquisition conserves existing lines of credit as well as conserves working capital.
  • In addition to the above mentioned benefits, financial/capital leasing also provides a slight hedge against monetary inflation.

Is a financial/capital lease right for your company?

  • Yes, if your company wants to own the asset. Your finance/accounting department wants to claim the depreciation and ownership of the asset and the unit is expected to have a long useful life.
  • Yes, if your company has a shortage of working capital and lines of credit.
  • Yes, if your company’s capital budget money is not available or insufficient for operations.
  • Yes, if your company still has old/outdated equipment with high maintenance costs and abundant downtime.

Choosing a financial/capital lease for your company can allow you to replace current equipment that is old/outdated, misapplied, or no longer used due to your operational needs changing. Replacing this old equipment can not only save you maintenance dollars and reduce downtime but also provide an improved and more ergonomic operator experience which can directly translate into improved productivity and efficiency.

Operating Lease:

Another one of the most common financial merchandising methods is called an Operating Lease.  Below are some of the features and benefits of choosing this particular financial merchandising option.

Features of an Operating Lease:

  • Level Monthly Payments.
  • Debt is Not on the Customers Balance Sheet.
  • Option to Purchase at Fair Market Value.
  • Pay only for the Portion of the Unit that is Used.
  • Rates are generally fixed but can be set up on a “Skip” or “Step” schedule.
  • Notice of Return, Return, and Performance language in the contract are key variables between Financial/Capital leases and Operational leases.
  • Standard Options: LTR, FMV, Residual, and Flex Leases.

Benefits of an Operating Lease:

  • Fixed monthly costs aid in budgeting and future planning for additional equipment or other business acquisitions.
  • Option to purchase the equipment at the end of the lease term at the equipment’s Fair Market Value.
    • generally the equipment’s Fair Market Value is a derivative of lease term, equipment type,expected hour usage per year, expected equipment condition at the end of term, residual value placed on the unit at time of sale and the application in which the equipment was used.
  • Unlike finance/capital leases, an operating lease can have the maintenance costs included in the monthly payment. Often times an arrangement like this is referred to as a “FMV Lease with Full Maintenance” or “Guaranteed Maintenance Lease”.
  • Monthly payments are normally expensed by the lessee rather than capitalized.

Is an Operating Lease right for your company?

  • Yes, if your company plans on utilizing the equipment for less than 7 years.
  • Yes, if your company wants to have your monthly payment incorporate both the lease rate as well as the maintenance rate rather than being billed for the two separately.
  • Yes, if your company’s revenue generation is heavily dependant upon seasonality. An operating lease designed with “skip” payments allows farmers and other seasonal businesses to make larger payments during their in-season while cash is abundant and then “skip” payments in their off-season when cash is not always readily available.
  • Yes, if your company currently has capital, accounting, and/or budgeting issues.
  • Yes, if your company currently has high maintenance costs, experiencing excessive downtime, using old/outdated equipment, or your operational environment is changing.

An operating lease can help your company gain control over operational issues, reduce costs, and improve productivity of your entire fleet. If structured properly, an operating lease can be a very powerful tool for your company.

Is your company currently in the process of receiving proposals for new or used equipment?

Contact Tri-Lift NC today to see what kind of unique financing or leasing packages that we can put together for you. There is no obligation to purchase, simply see the link below, and submit a little information about your equipment needs and your application.  We will be happy to help formulate the best possible package for your company and the equipment acquisition in question. Break away from the traditional financing packages just because they are easy to understand. You may be leaving thousands of dollars on the table by not participating in a lease or finance program that is tailored to your needs. A generic “one size fits all” lease is never the best option if your company is seeking to have absolute control and full information on their operational costs.

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