What is a finance lease?

A finance lease is often referred to as a non-tax capital lease. This type of lease involves the lessor — Cat Financial who is the owner of the property being leased — financing the asset in question, which in this case is a piece of equipment for your business. As AccountingTools explained, all other aspects of ownership then pass on to the lessee.

An option to purchase the equipment for a reduced price at the end of the lease contract's term is a necessary condition for a finance lease, Investopedia said. Additionally, a capital or finance lease must cover at least 75 percent of the equipment's projected useful life. Due to these conditions, a finance lease is often a good choice when you want to have a piece of equipment available for the long term and eventually own it.

The structure of a finance lease means your business essentially owns the equipment involved for tax and accounting purposes, which assumes both the benefits and liabilities. That has some major impacts on your financial statements, including accounting for depreciation and interest expenses. Generally, you can receive tax benefits like expensing depreciation and the interest paid during the lease, but not the principal of the loan payment itself. This is important to remember as you consider how your financial statements may be affected by a finance lease. 

How is a finance lease different from an operating lease?

Another option is an Operating Lease, which is a lease that offers low payments and multiple benefits. Cat Financial retains ownership of the asset and provides a range end of lease options to the lessee. With an Operating Lease, the lessee can purchase, renew or return the equipment when the lease is up

Additionally, some of the benefits that Operating Leases offer include no money down, avoiding the use of capital to acquire business assets, obtaining the latest technology, ability to match lease term to job requirements, increased bidding/bonding capacity, and level payments over the term of the lease.

Which is better, an operating lease or a finance lease?

It’s important to make the right choice for your business by identifying the benefits and drawbacks of each lease option available, and determine which will facilitate growth and keep your business moving forward. Here are some helpful questions to guide you during the decision-making process:

• Do I need additional cash flow and low payments? (operating lease) or not a concern at this time (finance lease)?

Even though operating leases are now accounted for on balance sheet, it is still the product with the lowest balance sheet impact and offers tax benefits, including the ability to expense payments straight line over the term of the lease.

• Is an option to purchase the equipment at the end of the lease important? (both leases offer purchase options at end of lease).

Leasing and other equipment financing options from Cat Financial

Cat Financial offers a range of flexible leasing and financing solutions that meet the needs of businesses in industries that require equipment. Our leasing products offer attractive end-of-term purchase options, 100 percent financing for qualified customers and many other benefits. You can also view our current special offers to maximize your savings. Want to request a quote from your local dealer? Simply Contact Us and fill out the short form to put yourself on the path toward getting your business the equipment it needs!