Finance Leasing Manual - FLM1.05

What is 'operating leasing'?

An operating lease is any lease which is not a finance lease. By contrast to finance leasing , all other kinds of leasing (called 'operating leasing') leave the lessor with an equity risk. That is, an operating lease is a lease where the lease terms do not guarantee that the lessor will get back all, or substantially all, of the cost of the asset plus a commercial rate of interest. So the lessor has an equity interest in the leased asset and has most or all of the risks and rewards of ownership.

The operating lessor hopes to do better than make a finance lessor's banker's interest return. The operating lessor takes an equity risk and hopes the market for its kit will reward it accordingly at the end of the lease period. But nothing is certain. The operating lessor's risk is that no-one will want to hire its kit, or they won't be prepared to pay the price it expects, or the kit is defective or wears out faster than expected. But the operating lessor could make a lot more money than a banker if it is successful and there is a big demand for its kit at good prices, the kit is durable and so on.