Leasing is an alternative to purchasing an asset, which can be more beneficial for a business in terms of cost-efficiency. In general, there are five types of leasing agreements. The two that will be compared in this paper are – operating, financial, sale-and-leaseback, combination, and synthetic (Brigham & Ehrhardt, 2017). This paper will compare operating and financial leases. Operating leases are necessary for the maintenance of operations. Since the cost of maintenance is built into the agreement, the lessee has a minimal risk when engaging in such an arrangement, which is their main advantage. The disadvantage of this lease type is the amortization, which is not fully accounted for in the payments. Hence, the lesser will be unable to recover the costs spend on the equipment, requiring them to rely on renewal of payments, lease for different lesser, or by selling the discussed asset (Brigham & Ehrhardt, 2017; Tardi, 2019). The main advantage for the lesser is the cancellation clause, according to which the equipment can be return if it is n longer necessary for the business operations.
Fiannaicla leases are not provided for maintenance. Instead, a business can negotiate with the manufacturer, and the latter will find a leasing company that will provide the necessary equipment through a lease. Unlike the operating leases, this type accounts for amortization, which is its main advantage (“What is the difference,” 2019). The disadvantages would include a built-in payment for a loan if the lessor had to obtain one to provide the asset. Additionally, there is no cancellation clause, unlike with operating leases, which means that the business will be unable to avoid payments if the equipment is no longer necessary. Based on this information, the type of lease that produces the lowest risk depends on the needs of the business. However, the operating lease appears to have fewer disadvantages.
References
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice [with MindTap] (15th ed.). Mason, OH: South-Western.
Tardi, K. (2019). Operating lease. Web.
What is the difference between a finance lease and an operating lease? (2019). Web.