Looking for a business finance solution without committing to owning the assets you require?
Looking for a business finance solution without committing to owning the assets you require? An operating lease might be the right choice for you. Read on to learn more about the fundamental features and benefits of an operating lease, and how it could help your business reduce risk and develop further.
What is an operating lease?
An operating lease is a form of rental agreement through which you can have use of an asset over a period of time, in return for paying regular instalments to cover this use. An operating lease will usually have a shorter life than that of the actual asset.
How does it work?
Over the agreed period of the operating lease, you will be able to make full use of the asset in question and in return make regular rental instalments to the asset finance company.
An operating lease is typically used where assets have a residual value, such as vehicles and machinery. The residual value of the asset is estimated when the lease is set out. The leasing company runs the risk that this value could increase or decrease over the period of the contract. However, the residual value is still set at the beginning of the contract.
The rental payments do not cover the entire cost of the asset or assets but are calculated based on the original purchase price and the forecast residual value. Other services such as maintenance of the assets, may also be included in the operating lease, depending on the exact terms laid out in the initial agreement. This is most usual for vehicle leasing, where the arrangement is more commonly known as contract hire.
At the end of the operating lease, the asset will be returned to the leasing company for it to either be re-hired or to sell it on to release the residual value of the asset. Due to the nature of an operating lease, it is currently considered as an off balance sheet arrangement (although accounting regulations are under review).
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What are the benefits of an operating lease?
Fixed, known payments
Improved cash flow
- Reduced tax payments and the option to reclaim VAT
- Rentals are considered an expense item
- Additional line of finance that may not affect banking arrangements
- Reduces the risk ownership
Will it work for my business?
An operating lease will provide you with much needed assets for your business, which you may not have been able to access otherwise. With the option of an off balance sheet finance agreement, and a maintained cash flow that’s not significantly affected by obtaining new assets, an operating lease is a very appealing option.