What is the difference between a finance lease and an operating lease in corporate finance?

What is the difference between a finance lease and an operating lease in corporate finance Introduction: The Significance of Leasing in Corporate Finance Hello, and welcome to this insightful video on finance leases and operating leases in the context of corporate finance. Leasing is a prevalent practice in the business world, allowing companies to acquire essential assets without the need for significant upfront investments. However, not all leases are created equal, and understanding the differences between finance leases and operating leases is crucial for effective financial management. Defining Finance Leases: A Closer Look A finance lease, also known as a capital lease, is a type of lease agreement that effectively transfers the risks and rewards associated with owning an asset from the lessor to the lessee. In other words, it's a lease that resembles a purchase. Under a finance lease, the lessee is responsible for the maintenance, insurance, and other costs typically associated with ownership. Additionally, finance leases often have a longer duration, and at the end of the lease term, the lessee may have the option to purchase the asset at a predetermined price. Understanding Operating Leases: A Different Perspective On the other hand, an operating lease is more akin to a rental agreement. Unlike a finance lease, an operating lease doesn't transfer the risks and rewards of ownership to the lessee. Instead, the lessor retains ownership throughout the lease term. Operating leases are typically shorter in duration and often involve assets that have a shorter useful life. Additionally, the lessor is responsible for the maintenance and other ownership-related costs.