Operating Leasing
While the term for a finance lease is long, an operating leasingisusually resorted to if the need of equipment is for a shorterperiod.Here the full cost of the equipment is not recovered and at theend ofthe lease term, usually the equipment is leased to some othercustomeror is sold second-hand.
Finance Leasing
This comes closest to the hire purchase option of asset financing withone major difference – the ownership of the asset doesn’t gettransferred to the business customer at any point of leasing period.
In this arrangement the customer pays the full cost of the equipment,plus the charges in the form of lease rentals over the period of thelease. The customer also gets to bear risks and enjoy benefits usuallyassociated with the ownership without actually owning the asset – hemust bear the maintenance and insurance cost of the asset and will haveto treat the asset as a capital asset in the balance sheet.
At the end of the lease term, usually the asset in question is re-leasedto the customer at much reduced payments or is sold second-hand to anunrelated third party.