What is an Operating Lease?
An Operating Lease is where you pay to use vehicle/equipment over a fixed period with one payment per month. This payment covers all costs associated with the vehicle/equipment.
In other words, you effectively rent the equipment from the financier for a specific term and you never own the equipment.
Do you need a vehicle but cannot get finance due to the following reasons then this could be an option for you:
- Is your business is under 2 yrs old?
- Do you have limited assets?
- Are you renting?
An Operating Lease allows you to budget, helps cash flow and with a team of fleet management experts to assist your fleet requirements, is completely hassle free!
An operating lease is not capitalised. It is accounted for as a rental expense in what is known as “off-balance sheet financing”.
You are probably now saying “if I don’t own it why would I look at an Operating Lease?”
In our experience clients typically use this product where they have either:
- Won a fixed term contract and/or
- dD not have a capital expenditure budget and/or
- Require the equipment specifically to be “off balance sheet”
Examples of when you could use this type of lease
You win the tender for a contract for a fixed term. You now need to buy a substantial amount of new equipment. This equipment could be a different type of equipment than your regular business needs. So the Operation Lease contract is for a set term (such as a road construction project) and the equipment is specific for the project.
The accountant needs to comply with annual capital and expense budgets. The equipment may not be budgeted in the capital budget. However, they require the equipment immediately. In this case, as the equipment is off balance sheet, it may be easier to have the equipment approved as a monthly expense. Instead of having to apply for a Capital Budget increase mid-year.
You need to acquire equipment that will become obsolete due to changes in technology or simply wears out after a period of time.
What happens at the end of the lease?
The distinguishing feature of an Operating Lease is that the financier assumes all residual value risk on the equipment.
At the end of your lease term, all you need to do is hand back the equipment (usually subject to normal wear and tear conditions being met) and pay any additional hourly usage charges. Of course, you should check the terms and conditions that are applicable to the operating lease.
The benefit of this is that you do not need to dispose of the equipment. Where at an auction or via private sale the equipment may not reach the value that you were expecting. Or there are a number of pieces of the same equipment coming back onto the market at the same time that may delay the time to sell.
At the end of the rental agreement you can either:
- Return the old equipment and upgrade to new
- Return the old equipment and walk away
- Continue to rent on a month to month or for a fixed term with a discount
- Offer to purchase the equipment for fair market value (FMV)
Operating Lease Features and Benefits
- Payments may fully tax deductible if used for business
- Fixed monthly lease repayments –easy budgeting
- Off-balance sheet so payments are treated as an expense and the liability is only shown in the balance sheet notes
- All inclusive – registration, servicing, tyres and maintenance all included
- Make your ownership decision at the end of the term rather than the beginning
- Flexibility, so you can add and remove equipment, change the term and your payments
- Reduced administration, with no need to keep asset and depreciation schedules
- Lower interest rate as financier invests in the residual value
- 100% financing including software, installation, and maintenance
- Removes ownership problems such as disposal
- Allows you to keep pace to with technology at no extra cost
- Reduced Total Cost of Ownership
Not sure yet if an Operating Lease is the best option for you? Check out our other Lease Options.
Check out our Commercial Finance Page for all our commercial finance options.
If you need an Operating Lease that is just right for your business, contact us online or call us on 02 9453 0300 and learn how Commercial Point Finance can help your business grow.