Business leasing: the pros and cons

What is Operational Lease?

Let’s start with Operational Lease. What exactly does that mean? The leasing company remains the owner of the car in the case of Operational Lease, throughout the lease period. So after the lease ends, you don’t own the car. You rent the car for the agreed upon term and pay a fixed monthly fee for its use. Costs such as maintenance and repairs are included in the lease amount, if desired. In fact, you may see Operational Lease as the “private lease” for the business driver.

Net Operational Lease and Full Operational Lease

There is a choice of “net” or “full” Operational Lease. With Net Operational Lease, operational matters such as repair, maintenance, insurance, breakdown service and replacement transportation are in-house. So you pay less money per month in this case. With Full Operational Lease, however, all additional costs such as repairs, maintenance, taxes and insurance are included in the lease rate.

What is Financial Lease?

With Financial Lease, the construction is somewhat different because once all payments are made, the car is fully owned by the company. So think of Financial Lease primarily as a kind of loan that you repay in monthly installments. With Financial Lease, the value of the leased car is on the company balance sheet, i.e., the company economically owns the car. Interest on the amount of money borrowed is deductible from profits. You may pay off the outstanding “debt” early with Financial Lease, but chances are the leasing company will charge additional fees.

Financial Lease and Final Terms

You can also opt for a final installment with Financial Lease. In that case, you pay a set residual amount upfront at the end of the contract term. You pay no repayment on this amount during the term of the contract, only interest. Why choose this? Simple: with a final installment, the monthly amount is lower.

Advantages and disadvantages of Financial Lease and Operational Lease

One thing is certain: financing a car for business is easy to arrange, but it is important to first educate yourself about the advantages and disadvantages of Financial Lease and Operational Lease. We list them below.

Advantages Financial Lease

• The company has direct economic ownership
• Take advantage of tax benefits; depreciation, investment deductions (KIA small-scale investment deduction, EIA energy investment deduction and MIA environmental investment deduction) and interest deductions
• With a final installment, the monthly amount is lower
• Within the company, assets are retained
• Suitable for new cars and used cars

Disadvantages Financial Lease

• Arranging your own car insurance
• Paying the road tax yourself
• Repair and maintenance you arrange yourself

Advantages Operational Lease

• No worries about repair and maintenance
• Monthly fee includes road tax, insurance and often international roadside assistance
• Residual value risk lies with leasing company
• You pay the VAT per month

Disadvantages Operational Lease

• You benefit from fewer tax breaks
• The car is not on the balance sheet
• No right to investment deduction
• No asset accumulation

Differences between Financial Lease and Operational Lease

Finally, a handy overview of the differences between Financial Lease and Operational Lease.

*different by provider