When evaluating lease agreements, two common types are operating leases and capital $($finance$)$ leases. Each type has unique characteristics, benefits, and risks that impact a company's financial statements and risk exposure.

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An operating lease is more like a rental agreement. The lessee uses the asset for a period shorter than its useful life and typically does not assume ownership at the end of the lease. These leases are often used for equipment or property that companies need temporarily or want to upgrade frequently.

Advantages include lower upfront costs, flexible terms, and off$-$balance$-$sheet financing $($depending on accounting standards$).$

Disadvantages include higher long$-$term costs and no ownership benefits or equity in the asset.

A capital lease, on the other hand, is treated like a purchase. The lessee assumes many of the risks and rewards of ownership and typically gains ownership of the asset at the end of the lease term.

Advantages include the ability to claim depreciation and interest expense for tax benefits and eventual asset ownership.

Disadvantages include higher financial liability on the balance sheet and greater upfront and ongoing costs.

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From a risk perspective, an operating lease generally produces the lowest risk, especially for companies wanting flexibility or uncertain about long$-$term needs. It avoids the commitment of ownership and reduces exposure to asset obsolescence.

In your current or future career field, which type of lease would make more strategic sense, and why?