What are Operating Leases?
An operating lease is a form of asset finance which allows you to lease a piece of equipment, while you need it. An operating lease is very similar to a finance lease, although the former is usually for a shorter period of time, usually a small percentage of the equipment’s expected lifespan.
The shorter nature of operating leases allows you to pay a reduced rental payment as there tends to be more residual value at the end of the term.
During the lease period, you get to use the equipment as you would if you owned it, but without the upfront financial outlay.
The Advantages & Disadvantages
Operating leases are a great choice for those looking to fund equipment over a shorter timescale but it’s worth looking over the advantages and potential disadvantages before making your decision.
- You don’t have to worry about selling the item when you no longer need it.
- If the item loses a significant amount of value, it won’t negatively impact you.
- The upfront cost of acquiring equipment using an operating lease is low.
- Operating leases are a flexible and cost-effective way to acquire equipment for your business.
- You can reclaim VAT on your rental costs.
- Maintenance is usually undertaken by the lender.
- You will not benefit from the item for its entire useful life.
- You will not benefit from any sale proceeds as you would when acquiring an item using a finance lease.
How Does It Work?
- You identify the item that you need to acquire.
- The asset finance provider will acquire the item on your behalf.
- A lease agreement is written up and you begin to lease the item from them for an agreed period at a set monthly payment.
- Once the lease period is over, the item is returned to the asset finance provider.
Is an Operating Lease Right For My Business?
Operating leases are ideal for items that are only needed for a set period of time, as they will usually be for a fixed, short term. This can be ideal for items that will quickly become obsolete or when newer, better models will soon be launched.
Operating leases allow for items to be regularly upgraded and can be a hassle-free solution for business owners. By removing the need to maintain and dispose of the item, a lot of time can be saved by acquiring your new equipment using an operating lease.
What Items Can Be Funded Using an Operating Lease?
We can consider funding for any asset, some common assets include:-Commercial vehiclesPlantCranesPrinting equipment and pressesMedical equipmentForklifts and other handling equipmentCommercial vehiclesCNC machines and tools
Operating Leases vs Finance Leases
Although they work in a very similar way in practice, once you scratch the surface, there are some key differences between the two. Understanding these can make a significant difference to the tax efficiency of your asset purchase.
Both allow you to acquire new equipment without having to fund the entire cost of the purchase upfront.
Operating leases are generally used for items which are expected to have a residual value at the end of the lease.
Finance leases are typically offered for most of the useful lifespan of the item. In addition, they have the advantage of allowing you to treat the item as if you owned it for accounting purposes, placing it on your own balance sheet. This allows you to offset depreciation, making it a potentially tax efficient option.
Operating Leases at A Glance
- The lease is for less than the usable life of the item
- The item is usually held off your balance sheet meaning that depreciation can’t be offset
- Maintenance is usually handled by the lender
- The asset is owned by the leasing company