Finance Leasing Manual - FLM1.26

Other differences between finance and operating lessors

Broadly, an operating lessor needs to manage its leased assets actively and needs expertise in the potential market for their use, choosing them, and maintaining them. For example, a plant hire firm needs to understand the market for the short-term hire of JCBs, bulldozers, compressors etc. They need to have the right selection of kit to meet the demand without being left with a surplus. They need to pick kit which is reliable, easy to service and will have a good resale value. They have to understand the hardware as well as the market. On the other hand, the purist view is that finance lessors don't have to know anything more about the kit or the market for it. They essentially make a lender's financial judgment about the ability of the lessee to pay the rentals.

But a rigid distinction between finance and operating lessors may be blurring because of competitive pressures. Finance lessors may be driven to take, for example, more risk by accepting part of their return from the residual value of the kit. This, in turn, means that they need to know more about the kit and the market for it. Generally, however, most finance lessors don't want to get into the hardware business because it is completely different: acquiring and maintaining the expertise needed to avoid bad mistakes is too difficult and too expensive.

The apparent distinction between finance and operating lessors has also been blurred because it has been possible to create an operating lease that is really a finance lease and vice versa: see FLM4.28.