Question 5.10: Explain the difference between a finance lease and an operat...

For an explanation of the difference between a finance lease and an operating lease, see Section 5.8.1. As for the importance of the distinction for corporate finance, operating leases are useful where equipment is required for a short time or where there is risk of obsolescence. The lessee may also be relieved of the cost of servicing and maintenance. Finance leases may be cheaper than purchase, especially if the lessee pays little or no tax. The lessor can obtain tax relief on the capital cost of the leased asset and pass the benefits on to the lessee in the form of lower lease payments. Other benefits claimed for leasing include the ‘off-balance-sheet’ nature of some kinds of lease finance and access for small firms to expensive equipment.