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What is an operating lease?
An operating lease is a type of lease which companies use to rent an asset for a fraction of the item's useful life. An operating lease provides the use of an asset over an agreed contractual period with monthly rental payments.
The operating lease meaning is very easy to understand, it is an equipment lease where a lessee rents an asset for a fraction of its useable life. So, what is an operational lease and how can my business benefit?
This type of lease will normally involve a set time period of 24, 36 or 48 months, depending on your individual requirements. The lessee does not take on any of the rewards or risks relating to the equipment ownership. Instead, the lease is simply a way for a business to rent equipment for a set timeframe.
The monthly payment costs of a business operating lease are based on a variety of factors, including:
The cost for the finance company to purchase the equipment.
The price of the equipment at the start of the operating lease.
In business lease arrangements which involve vehicles, the mileage allowance will be considered.
The estimated residual value of the equipment.
The interest rates attached to the operating lease agreement.
With so many factors impacting the total cost your business could pay, it is advisable to compare business operating lease options.
If you have not heard of this term, you may be familiar with the term 'business contract hire'. This term is often used in relation to commercial vehicle leases and is a common type of operating lease example.
Operating lease explained
If you're looking at asset finance and you're trying to understand whether or not an operating lease is the right solution, the main circumstance you need to take into consideration is if you would like to own the asset at the end of the agreement or not? Operating leases tend to be used for assets that have a residual value, such as vehicles, construction plant and machinery.
With an operating lease, the ownership of the asset remains with the lender “lessor” and at the end of the lease, the asset will be returned to the leasing company. The leasing company will either re-hire the asset in another contract or they may choose to sell it to release the residual value. At the end of the agreement, should the “lessee” wish to extend the agreement, this can often be arranged and will be done so according to the market value of the asset. There is no option to purchase the goods.
A guide to business operating lease agreements
Whether you are just starting your business or have been trading for many years, equipment always needs replacing or updating. An operating lease is often described as the simplest form of equipment hire. It can be used to obtain small items such as computers, laptops, furniture and the tools of your trade. This guide will explain everything you need to know about business lease contracts. So, that you can compare business operating lease options.
The benefits of an operating lease
There are many advantages of lease agreements to almost every business. In most situations, a lease commitment will provide more flexibility than hire purchase agreements or finance leases. This is because the lease payments cover any maintenance required and the lease is usually quite short.
The relatively short nature of operating lease contracts means that it is possible to upgrade equipment regularly. In fact, in some situations it is even possible to upgrade equipment during the operating lease period.
For example, an operating lease car will ensure your business always benefits from the latest model and most efficient technology.
There are also some benefits relating to operating lease accounting treatment. With operating lease journal entries, the business is likely to receive better tax benefits when compared to other forms of asset finance. The equipment is not included as an asset on the balance sheet, instead the expense can be offset against business profits.
Features of operating lease
An operating lease is a financial arrangement between the legal owner (lessor) and the user (lessee) whereby the following occurs:
The lessee (borrower or customer) chooses the asset required (machinery, plant equipment, vehicles)
The lessor (finance company) purchases the asset
The lessor recovers a large part or almost the complete cost of the asset in addition to earning interest from the rentals paid by the lessee
The lessee uses the asset during the agreed period in return for monthly rental payments
The lessee returns the asset at the end of the agreement
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Compare and find operating leases online with our easy to use loan finder service. We just need to know a little bit about your business and what you need, and we'll compare the best operating lease deals.
Having found the asset you need, it's important to find the right operating lease deal for you.
Operating Lease - Frequently Asked Questions
Once the terms of the operating lease have been discussed and your application has been successful, a contractual agreement is sent. The leasing contract will set out the details of terms of the operating lease. During the term of the operating lease, the user will pay a monthly rental to the asset finance company.
Under the terms of the agreement, you are obliged to pay all of the rentals up to the end of the contract. An operating lease usually includes a form of maintenance and is often over a short period.
Operating leasing is a flexible way to rent a high value asset without impacting your cashflow.
At the end of your operating lease your rentals will come to an end and the asset will be returned to the leasing company. The details will be set out in your contract, however, you can arrange for one of the following to occur:
You return the asset to the leasing company.
You extend the operating lease and keep the asset under a new agreement.
Before you compare business operating lease options, try to consider the specific requirements of your business. Think about the monthly budget your business has to spend, as the lease payments still need to be factored into cashflow.
Next, consider how long you will need to use the equipment for, as short-term requirements usually work well with business operating leases. However, if you will be using the equipment for more than 3 years, the total cost of payments could make it more economical to consider a loan option. Although, if the equipment will become obsolete quickly an operating lease will be a better solution than a long-term lease or purchase option.
You will also need to consider what type of equipment you are looking to finance, as there will be some conditions. If you are looking to lease a relatively low-value asset, your business may only be eligible for an operating lease. This is because other finance leases often have a minimum purchase requirement, which is suited to larger expensive items.
Finance Lease vs Operating Lease
At a quick glance there is not much difference between finance lease and operating lease agreements, as they are both used to access equipment. However, by looking in close detail the main difference between capital lease and operating lease arrangements become apparent.
If your business is not looking to purchase equipment, an operating or finance lease will both be a good fit. However, operating and finance lease agreements differ, as with a lease there is an option to purchase the equipment at the end of the rental period. The lessee is given an option to purchase the asset at a price lower than the fair market value.
In terms of accounting effects, an operational lease is treated as an expense, whereas in a finance lease it is treated as a loan. This means that with a lease the lessee owns an asset and it appears on the balance sheet. If the asset appears on the balance sheet there are tax benefits, as the lessee can claim depreciation and interest.
In operating lease, finance lease and capital lease agreements the business must pay a monthly payment. With a business lease there is only one single payment with no additional costs to consider for tax, repairs and administration.
However, within other lease agreements the lessee must also pay insurance, tax and maintenance.
The final key difference between an operating lease and a finance lease is the length of the agreements. A business lease will run for less than 75% of the useful life of the equipment. In comparison, within a finance lease the term tends to cover the full economic life of the asset.
It is difficult to find a finance lease and operating lease example, as they are used for different types of equipment. An operational lease will usually be obtained for smaller equipment, such as computers, technology, laptops and printers. In comparison, a finance lease will be used for more expensive items such as plant and machinery, buildings and land.
With so many options available to every business, it is important to compare business lease options to find the best deal.
Compare business Operating Lease availability
Here at BusinessComparison, we specialise in sourcing competitive finance for businesses. Our panel includes more than 30 lenders who can provide everything from business operating lease agreements to contract hire arrangements. We have developed a convenient operating lease calculator, which will help you quickly compare business operating lease options.
Simply enter a few key details into our finance finder tool, such as:
How much you need to borrow.
What equipment you are looking to finance.
How long your business has been trading.
Your average monthly turnover.
The sector which you operate in.
Once we have your information, we will scour our panel of operating lease providers to find the best rates. By working with both traditional and alternative lenders, we guarantee to provide you with some of the best rates available. The next step will be for you to compare business operating lease options and decide which is the best deal.
We will then pass your details across to the lender who will process and finalise your lease agreement. Once complete, your business could have access to the finance in as little as 48 hours.
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If you have read this useful guide you will easily be able to define operating lease agreements and have a clear idea whether they suit your business. If you have any further questions or would like to compare business lease options, please contact our team today.
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