What is an operating lease?
An operating lease is a form of rental agreement through which the customer can have use of an asset over a period of time in return for making regular rental instalments to the asset finance company.
An operating lease agreement is typically used where assets have a residual value, such as vehicles and machinery. The residual value of the asset is estimated when the operating lease is set out. The risk in forecasting this residual value sits with the leasing company and the actual value at the end of contract could be greater or less than expected, The customer doesn’t bear this risk.
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, may also be included in the operating lease, depending on the exact terms of the lease agreement.
At the end of the operating lease, the asset is returned to the lessor for it to either be re-hired or to be sold 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 forthcoming accounting regulations may change this in the future, subject to certain new rules.
An operating lease agreement provides a business with much needed assets which it 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.
What are the benefits of an operating lease agreement?
• Fixed, known payments
• Improved cash flow
• Reduced tax payments and the option to reclaim VAT
• Rentals treated as an expense item
• Additional line of finance that may not affect banking arrangements
• No ownership risk
Why choose an operating lease contract?
Using an operating lease contract could open up new opportunities and scope for your business. With the financial advantages of an operating lease, it becomes simpler to finance vital equipment and machinery without negatively affecting your cash flow and with the additional benefit of paying for the use of the asset in instalments.
If you want to learn more about financing business equipment with an operating lease agreement, contact our expert team at Anglo Scottish Asset finance for more information. Alternatively, learn more about your asset finance options and see how it could support your business.