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Operating Lease | What You Should Know
What is an Operating Lease?
The easiest way to think of an operating lease is that it’s a rental arrangement. If you’ve ever hired a car for a few days, chances are you have experienced a short term operating lease.
When it comes to asset finance, there’s a whole spread of options available. Operating lease is where you don’t own the asset, and you pay someone else for the use of that asset. It’s not yours, you can’t particularly mess with it, and you give it back when you’re done.
Operating leases are great for companies who want to have the use of an asset with none of the hassle that comes with owning it.
In a nutshell:
- An operating lease is like a rental agreement
- Most operating leases come with maintenance
- Operating leases are excellent for a one-payment worry-free use of an asset
- Operating leases allow you to get access assets your business couldn’t otherwise afford
- Operating leases give you the freedom to upgrade assets as technology improves
To check your eligibility and get a free asset finance quote, complete our simple form below:
Contents
Why Use an Operating Lease?
How an Operating Lease Works
The Benefits of an Operating Lease (Maintenance & Insurance)
Operating Lease Disadvantages
Operating Lease Case Studies
Fair Wear and Tear
Operating Lease vs. Finance Lease and Hire Purchase
Operating Leases and Accounting
How to Apply
Why Use an Operating Lease?
Buying assets takes a considerable amount of capital.
While your business may have the capital available to purchase the assets it needs, doing so could have a major impact on your ability to use that capital in other ways, such as expansion, salaries, or marketing.
An operating lease allows you to gain access to an asset you otherwise wouldn’t be able to afford, as well as providing a number of other benefits.
How an Operating Lease Works
Operating leases are designed to be as straightforward as possible. While not all operating leases are the same, the basic premise is the same:
- You pay a set monthly fee
- You get full use of your asset for the length of the contract
- When the contract is finished, you hand the asset back
- Additional fees may be due if the asset is damaged beyond fair wear and tear
In addition to these four basic principles, some operating leases offer more. These are sometimes called all-inclusive operating leases, contract leases or contract hire.
The main addition that is offered in these terms is the inclusion of a maintenance contract as part of the operating lease.
The Benefits of an Operating Lease (Maintenance & Insurance)
Leasing companies know that what some of their customers really want is to never have to think about their asset outside of it being there for their use. Ongoing repairs and maintenance? No thank you!
For those customers, there’s the maintenance portion of the operating lease. This enables a company to lease an asset and just use it. If something goes wrong, they contact the leasing company and arrangements are made to repair or replace the asset. In many cases, an temporary replacement is provided while those repairs take place.
Some leasing companies will even include all relevant insurance, including all costs in the single monthly payment; this means there are no other charges.
Of course, these benefits are not free - you pay for them under the contract as part of your monthly leasing fee, but if the idea of completely worry-free asset use is needed for your business, then it’s an operating lease you need.
The Limitations of a Maintenance Agreement
It does need to be said that the almost magic-like no-worry arrangement is not standard for all operating leases.
Insurance, too, will come with an excess. It is rare to find an insurance arrangement with zero excess that literally deals with everything if you crash. They do exist, but should definitely not be considered the normal option.
As with all contracts, it's important you read it thoroughly and check any parts you are not completely sure on.
Operating Lease Disadvantages
The main disadvantage of an operating lease is that you do not own, and never will own, the asset.
This means the leasing company is able to stipulate restrictions on its use. These may include:
- A ban on modifications - Expecting that the asset is returned in the same state as it was leased is not unreasonable, but restricting modifications can be a problem for some. Examples include computers that cannot have alterations made to disk drives or memory; or vans that cannot be fitted with additional equipment, shelving, or livery.
- Limitations on usage - Asset depreciation is a significant factor in calculating the lease cost, consequently assets may have limitations on usage. An example is a mileage cap on vehicles.
- Location restrictions - Some operating lease contracts dictate the location an asset is to be used or stored, and changing that location has to be confirmed with the leasing company. Examples include scientific equipment that must remain in the lab; or cars that cannot be taken out of the country.
Operating Lease Case Studies
Read some of our most recent asset finance case studies below for real examples of how asset financing works in practice, from operating leases to hire purchase agreements:
Fair Wear and Tear
Another of the key factors in an operating lease is the fair wear and tear on the asset.
It is expected that the asset will suffer some wear over the course of the contract, but it should be treated well and looked after. An asset that is returned in a particularly poor condition will incur additional fees at the end of the contract - and depending on the level of damage, these may be considerable.
Operating Lease vs. Finance Lease and Hire Purchase
Operating leases are one option under the umbrella of asset finance that also includes finance leasing and hire purchase.
The key difference between an operating lease and a finance lease is flexibility. With a finance lease, there is typically an option to purchase the asset at the end of the contract, which an operating lease does not have.
Finance leases also tend to be for longer terms, although this is not always the case. Due to the maintenance portion that is typical for an operating lease, monthly operating lease payments tend to be larger than those for finance lease.
Comparing operating lease with hire purchase provides more differences. Hire purchase is specifically designed as a way to buy an asset and pay over time, offering full ownership of the asset. Consequently, it is significantly more expensive than an operating lease each month. Hire purchase arrangements come with all the maintenance and service problems of ownership.
Operating Leases and Accounting
With an operating lease, the business does not own the asset. Instead, the monthly payments are considered an operational expense.
How to Apply
At Clifton Private Finance, our specialised asset finance team are experts in operating leases for assets.
We’ll find you the operating lease that best suits your business need and talk you through all the alternative options, including hire purchases and finance lease, to ensure that you get the agreement you truly want.
Contact us today to see how an operating lease can help your business.
