How is financial lease different from operating lease?

What is a financial lease?

A financial lease is a popular form of vehicle financing for entrepreneurs who do not want to make a large one-off investment. It allows you to drive a company car for a fixed monthly payment. The unique aspect of a financial lease is that as a customer, you become the direct economic owner of the vehicle. This means that the vehicle will appear on your company's balance sheet, which can have accounting advantages.

With a financial lease, you pay a fixed amount every month, which makes it easier to budget. In addition, at the end of the lease period, you fully own the vehicle. This offers the flexibility to keep the vehicle, sell it or trade it in for a new lease. This form of leasing can be especially attractive for self-employed people and SMEs who want to keep their working capital for other business activities.

What is an operating lease?

Unlike financial leases, with an operating lease, the lessor retains legal ownership of the vehicle. This means you only use the vehicle for the duration of the lease contract. Maintenance responsibilities and other operational costs are often included in the lease price, which can make this option attractive for companies that do not want to worry about additional costs.

An operating lease offers flexibility at the end of the contract, as you can usually return the vehicle without further obligations. This can be advantageous if you want to use a company car without hassles about residual values or resale. This form of leasing is often popular with companies that want to renew their fleet regularly.

What are the advantages and disadvantages of both lease types?

Financial lease offers the advantage of ownership and fixed monthly costs, which makes budgeting easier. You have the option of becoming the full owner of the vehicle at the end of the contract. A disadvantage can be that you are responsible for maintenance and possible depreciation of the vehicle.

Operating lease, on the other hand, takes many of these responsibilities off your hands, as maintenance is often included in the lease price. However, this can mean higher monthly costs and no accumulation of ownership rights. The choice between these two lease types depends heavily on your business strategy and financial situation.

How does lease choice affect a company's accounts?

Financial leasing has a direct impact on your balance sheet. The vehicle is recorded as an asset and the lease liability as a debt. This affects your financial reporting and can affect your credit rating. However, it also allows you to claim depreciation, which can have tax advantages.

Operating lease is often treated as a rental agreement, which means that the lease payments are recorded as operating expenses. This has less impact on the balance sheet because the vehicle does not become the company's property. This approach can be attractive for companies that want to keep their balance sheet light.

What are the tax implications of both lease types?

Financial leasing offers tax advantages because you can deduct interest and depreciation costs. This can result in a lower tax burden and a more attractive cash flow position. It may also mean you qualify for investment deductions, depending on the specific circumstances.

With an operating lease, monthly payments are fully deductible as business expenses. This can reduce the tax burden, but does not offer the same depreciation benefits as a financial lease. It is important to consider your company's tax strategy and goals when making a choice.

When is a financial lease more advantageous than an operating lease?

A financial lease can be more advantageous for companies looking to own their vehicles and take advantage of the associated tax benefits. This is often the best choice for companies that want to use their vehicles for a long time and are willing to take care of maintenance.

For companies keen to renew their fleet regularly without worrying about ownership or residual value, an operating lease may be a better option. The choice between these lease types depends heavily on your business strategy, financial objectives and fleet management needs. It is always advisable to consider the options carefully and seek professional advice if necessary.