Operating lease

If your business requires specialist equipment, like machinery, an operating lease can provide an easily accessible — low-risk solution.

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What is an operating lease?

Operating leases involve you paying a rental fee, to use an asset your business needs — for a limited amount of time. Operating leases are sometimes known as business contract hire, especially if it relates to commercial vehicles.

Like finance leases, operating leases are a form of equipment leasing.

Operating leases — considerations

An operating leasing company is referred to as a lessor, while the business receiving finance is called a lessee.

Operating leases are arguably the most straightforward type of equipment leasing. Here the lessor retains the risks and rewards of the asset — such as maintenance costs. As you do not pay for the item in full, installment payments tend to be lower with this form of leasing — when compared to a hire purchase (for example).

An operating lease can improve your business’s cash flow — as the rental payments can be matched to your pattern of income. They are typically reserved for renting an asset over a short to medium time-frame — while finance lease terms usually run until the end of the assets useful life.

Operating leases may also present significant tax advantages to your businesses, as the rental payments may be treated as a revenue expense in your financials (i.e. the asset doesn’t appear on your balance sheet).

An operating lease is particularly suitable for companies needing equipment, that needs to be regularly upgraded, as at the end of your short agreement — you can simply return the old equipment for something newer.

How does operating lease work?

Businesses interested in an operating lease, would first need to seek a leasing company. Should your application for financing be accepted, you may (or may not) need to put down a small deposit.

This is followed by a series of regular payments — for the duration of the agreement. Upon contract expiry — you hand the asset back to the lessor. With some agreements, you also have the option of extending the lease, upgrading to new equipment or buying the asset (based on its residual value).

Benefits of an operating lease

  • Easy to apply and receive an offer
  • Reduced risk — no need to worry about the asset losing value or disposing of it
  • Flexible lease terms — tailor payments according to your sales pattern
  • Plenty of options at the end of an agreement — return, rehire, upgrade or buy
  • Tax advantages
  • Maintenance handled by lender

Limitations of an operating lease

  • You usually don’t own the asset at the end of the agreement
  • Repayments can be more expensive than capital leases — as it’s a shorter-term agreement
  • Failure to make repayments may result in repossession

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