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Operating Lease

Operating Lease

What is an Operating Lease?

An Operating Lease enables you to rent an asset when you need it. Unlike a Financial Lease, where you lease the equipment for its entire useful life, an operating lease is only for a portion of the asset’s working life.

The rental price you pay reflects this difference. Rental costs are reduced based on the difference between the asset’s initial purchase price and its remaining value at the termination of the agreement.

Operating Lease

Operating leasing advantages and disadvantages

The main advantage of choosing an operating lease to finance machinery is you get full use of the asset for as long as you need it, without the burden of responsibility of disposing of it or recouping its residual value.

It is beneficial for companies that use equipment that needs upgrading regularly. You can keep up to date with the latest makes and models without requiring a large capital outlay every few years.

Similarly, there are benefits if you only need specific equipment or to finance machinery for a particular project or client. An operating lease ensures you do not have equipment sitting around doing nothing except costing you money in maintenance and storage.

One potential disadvantage is that you do not own the machinery or equipment. You cannot recoup any of the residual value. At the end of the operating lease agreement term it returns to the lessor.

If you require the machinery again, you will need to begin a new lease. If, at that point, you are not in a financial position to lease the equipment, you may need to consider other forms of asset finance.

Operating Lease

Finance vs operating lease

Choosing the right lease is vital for the financial welfare of your business. Before you decide on the right lease for your needs, consider:

  • The type and cost of the machinery or equipment you need.
  • How long do you need the asset?
  • Whether you will need to upgrade the asset before the end of a financial lease.
  • How often it will be used over the longer term.
  • Whether you want to be responsible for the equipment’s resale or selling on.

Storage space, expansion plans, future capital for leveraged loans, and your business’s overall financial health will also play roles in whether you choose an operating lease vs financial lease.

Further benefits of an Operating Lease

  • Flexibility – Option to re-rent, return or purchase the asset at the term’s end
  • Freedom – Complete use of the asset without having to purchase it outright
  • Low initial outlay – Ready access to the required asset without significant upfront investment
  • Off balance sheet funding – it doesn’t appear as an asset on your balance sheet
  • Pay less – Reduced rental cost based on a percentage of the assets original capital cost
  • Reduce costs – Reclaim VAT on rentals
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