Operating leases

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Operating leases

Updated: 5th March 2021

Operating leases offer you access to large pieces of equipment and machinery without using up your capital. They are a form of equipment lease that runs for only part of the economic life of the asset, so are beneficial if you only need an asset for a relatively short period.  

This contrasts with finance leases, which are another type of equipment lease, and involve longer-term contracts. With an operating lease, you are not tied into a long contract and do not generally take responsibility for the costs of maintenance and repair.

How do operating leases work?

An operating lease is a fixed term rental contract that does not transfer ownership to your business at the end. Your use is usually unrestricted, and the asset does not appear on the balance sheet.

The lender forecasts the asset’s residual value at the end of the lease. The difference between this figure and the original purchase price is used as the basis for your repayments.

Matching the use of an asset with the life of your own contracts is cost-efficient, and helps with budgeting and cash flow.

What happens at the end of an operating lease?

A number of options may be available at the end of the term, including:

  • Retaining the asset and negotiating a new agreement with the lender
  • Returning the asset - the lender will either sell it to realise the residual value, or arrange a contract with a different business
  • Upgrading the equipment may also be an option

What type of business might use an operating lease?

New, growing, and established businesses that need access to flexible funding and high-value assets may find operating leases a suitable option, particularly if advancing technology means the asset needs to be regularly updated.

The short-term nature of operating leases could meet the funding needs of businesses across all industries. Furthermore, they are not only suitable for large machinery and equipment - assets such as printers and other office appliances can be leased in this way.

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What are the advantages of operating leases?

  • Fast access to high-value assets without significant upfront investment
  • Lower rental costs when compared with some other forms of lease funding
  • Operating leases do not appear on the balance sheet and you may be able to offset the rental payments against profits, as well as reclaiming VAT
  • No responsibility for disposing of the asset when you have finished using it
  • Short-term nature of operating leases offers flexibility and operating agility to new and established businesses
  • You may be able to upgrade the asset during the term of the lease
  • Interest rates are fixed so you can budget effectively
  • Operating leases can help seasonal businesses to control cash flow

For more information on operating leases, and whether they could help your business, call Real Business Finance. We will provide guidance on all your finance options to ensure you choose the most appropriate method. Call one of the team to arrange a free initial consultation.

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