{"id":183447,"date":"2023-10-17T23:37:13","date_gmt":"2023-10-17T22:37:13","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=183447"},"modified":"2025-07-02T00:37:28","modified_gmt":"2025-07-01T23:37:28","slug":"operating-financing","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/startups\/operating-financing\/","title":{"rendered":"Operating vs Financing Leases for Startups"},"content":{"rendered":"\n<p>As a <a href=\"https:\/\/legalvision.co.uk\/startups\/difference-between-founder-director\/\">startup owner<\/a>, you will likely discover numerous expenses arising. For example, your startup may need a piece of expensive equipment like a complex manufacturing unit or a fleet of vehicles. Leasing can be an alternative to raising debt or equity financing to acquire use of the asset. There are two different types of leasing: operating and financing leases. Operating leases give you the use of an asset for a relatively short period. In contrast, financing leases last for much longer and usually give you the ability to take ownership of the asset at the end of the lease agreement. This article will evaluate the difference between operating and financing leases so you can determine which is right for your startup.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What Are Leases?<\/h2>\n\n\n\n<p>The following assets are commonly the subject of leases:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>airplanes and helicopters;&nbsp;<\/li>\n\n\n\n<li>ships and other watercrafts; and<\/li>\n\n\n\n<li>machinery and manufacturing equipment.<\/li>\n<\/ul>\n\n\n\n<p><a href=\"https:\/\/legalvision.co.uk\/startups\/leasing-types\/\">Leases<\/a> are a form of contract with the following characteristics:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>the lessor is the party that grants the lessee (your startup) use of an asset that the lessor owns;<\/li>\n\n\n\n<li>the lessor retains ownership of the asset throughout the term of the lease; and<\/li>\n\n\n\n<li>the lessee pays the lessor a fee to use the asset, similar in principle to rent.&nbsp;<\/li>\n<\/ul>\n\n\n\n<p>All leases require the lessee to take good care of the asset while in the lessee\u2019s use. However, not all leases require the lessee to maintain and insure the asset at the lessee\u2019s expense. Generally, there are two key types of leases:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>operating leases; and&nbsp;<\/li>\n\n\n\n<li>finance leases.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Operating Leases<\/h2>\n\n\n\n<p>Operating leases are shorter-term leases. The predominant purpose of an operating lease is to give the lessee the benefit of the use of an asset for usually between two to five years.&nbsp;<\/p>\n\n\n\n<p>Under an operating lease, the lessor retains ownership of the asset and is responsible for the maintenance and repairs. Note that exceptions apply to the maintenance and repairs of aircraft and shipping leases. Furthermore, the lessor will also typically insure the asset.&nbsp;<\/p>\n\n\n\n<p>Operating leases do not, by themselves, give the lessee the right to take ownership of the asset at the end of the lease. However, parties can agree to convert an operating lease to a financing lease to achieve this.&nbsp;<\/p>\n\n\n\n<p>Compared to financing leases, operating leases offer more flexibility. For example, you may have the right to terminate the lease early.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Accounting and Tax Considerations<\/h3>\n\n\n\n<div  class=\"box box--icon box--info\">\n    <p>Since 2019, accounting policies changed so that payments made under an operating lease are no longer treated purely as an expense. This changes the previous position, which is that operating leases were \u201coff-balance sheet\u201d transactions.<\/p>\n<\/div>\n\n\n\n<p>Now, as with financing leases, you record the benefit your startup obtains under the operating lease as an asset on your balance sheet. This benefit depreciates in line with the length of the lease. This reflects the fact that as a lease comes closer to its expiry, it is worth less. You charge this depreciation in successive years as a non-cash expense for tax purposes.<\/p>\n\n\n\n<p>Likewise, under your startup\u2019s liabilities, you record the obligations to make the payments as a liability. You write this down each year as the lease approaches its expiry.&nbsp;<\/p>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold text-orange\">\n        Need legal advice?\n        <br>\n        <span class=\"text-lg not-prose\">\n                            Call <a href=\"tel:+448081968584\" class=\"not-prose\">0808 196 8584<\/a> for urgent assistance.\n                <br>\n                Otherwise, complete this form, and we will contact you within one business day.\n                    <\/span>\n    <\/div>\n\n    \n\n<div class=\"not-prose flex justify-center text-left gform_input_bg_white    \">\n    <script>\nvar 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However, the repairing and maintenance costs fall to the lessee. Likewise, you will also insure the asset.&nbsp;<\/p>\n\n\n\n<p>The terms of the lease will specify the price the lessee pays to take ownership of the asset at the end of the agreement. This may be at a nominal cost or a predetermined price, such as the market value of the asset at the time of the lease\u2019s expiry. In some cases, the agreement may obligate the lessee to purchase the asset. Depending on how the agreement specifies the purchase price, this obligation may be to the benefit or detriment of the lessee.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Accounting and Tax Considerations<\/h3>\n\n\n\n<p>From an accounting and tax perspective, financing leases are more complex than operating leases. However, the most recent changes to accounting policies have made them substantially similar.&nbsp;<\/p>\n\n\n\n<p>Remember that a financing lease\u2019s purpose is to effectively transfer ownership of the asset over time to the lessee. From a legal perspective, this happens at the end of the lease, subject to its terms. But from an accounting perspective, the goal is to apportion payments under the lease so that your balance sheet reflects that you are obtaining the benefit of the use of the asset, as well as paying towards its acquisition. The portion of the payments made under the lease to this effect are assets for accounting purposes. Your startup then charges depreciation on the value of the accruing asset value under the lease.&nbsp;<\/p>\n\n\n\n<p>The obligation to make payments under the lease is treated as a liability. Certain accounting treatments distinguish the portion of lease payments that act as interest paid to the lessor. This has certain tax implications.&nbsp;<\/p>\n\n\n    <div class=\"my-7 lg:my-10 border-y-2 border-gray-100 py-7 lg:py-10 flex flex-col sm:flex-row items-start gap-10\">\n                    <img decoding=\"async\" class=\"w-52 mx-auto my-0! rounded\" src=\"https:\/\/img.legalvision.com.au\/wp-content\/uploads\/sites\/4\/2022\/09\/06164254\/uk-startup-manual-290x410-1.jpg\" alt=\"Front page of publication\"\n                 loading=\"lazy\" width=\"208\" height=\"298\">\n                <section>\n            <div class=\"text-2xl font-bold\">UK Startup Manual<\/div>\n            <div class=\"body-text\">\n                <p>LegalVision&#8217;s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.<\/p>\n            <\/div>\n            \n\n<a href=\"https:\/\/go.legalvision.co.uk\/uk-startup-manual.html\" class=\" block px-5 py-3.5 max-w-fit bg-orange button__hover transition rounded text-white font-bold text-lg no-underline uppercase leading-tight text-center\" target=\"\" rel=\"\">Download Now<\/a>        <\/section>\n    <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\">Key Takeaways&nbsp;<\/h2>\n\n\n\n<p>Operating leases are suitable for where your startup only needs the asset for a relatively short period and where your startup does not wish to incur maintenance and insurance obligations. Finance leases are similar in principle to loans in that you make payments over a long period to acquire ownership over the asset. The difference is that ownership remains with the lessor rather than with you. However, at the end of the financing lease, your startup can acquire ownership of the asset.&nbsp;<\/p>\n\n\n\n<p><br>If you need help with your startup, our experienced <a href=\"https:\/\/legalvision.co.uk\/startup-lawyers-lp\/\">startup lawyers<\/a> can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on <a href=\"tel:+448081968584\" class=\"AVANSERnumber dynamic-number\">0808 196 8584<\/a> or visit our <a href=\"https:\/\/legalvision.co.uk\/membership\/\">membership page<\/a>.<\/p>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"9eb4f72322\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/183447\" \/>            <input value=\"https:\/\/legalvision.co.uk\/startups\/operating-financing\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"Operating vs Financing Leases for Startups\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>As a startup owner, you will likely discover numerous expenses arising. For example, your startup may need a piece of expensive equipment like a complex manufacturing unit or a fleet of vehicles. Leasing can be an alternative to raising debt or equity financing to acquire use of the asset. There are two different types of<a href=\"https:\/\/legalvision.co.uk\/startups\/operating-financing\/\">Continue reading <span class=\"sr-only\">&#8220;Operating vs Financing Leases for Startups&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13522,"featured_media":3203,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"1087,183207,179086,3296,173091,174845","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[31],"tags":[20,21,774,860,1413],"class_list":["post-183447","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-startups","tag-small-business","tag-medium-business","tag-leasing","tag-startups","tag-startup-financing"],"acf":[],"yoast_head":"<!-- This site is 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