What Are Operating Leases?
An Operating Lease is a type of Equipment Lease where the customer, also known as the lessee, rents an asset for a fraction of the items useful life. An Operating Lease might also be known as Business Contract Hire, particularly if it relates to commercial vehicles.
Operating Leases Explained
Operating leases are the simplest form of Equipment Leasing, where the customer doesn’t take on the risks and rewards of owning the asset – such as maintenance costs, an Operating Lease is essentially a method of renting an asset for your business, over a short or medium time frame.
Why Choose Operating Leases?
Usually Operating Leases include some kind of maintenance provision and they often have relatively short lease periods, meaning the lessee has more flexibility than they would with Finance Leases or Hire Purchase.
Another indirect benefit of an Operating Lease, is that because they usually have short terms, it’s possible to upgrade regularly. Some facilities even allow upgrades during the term.
There can also be some tax benefits to Operating Leases and Business Contract Hire instead of another form of Asset Finance, because instead of appearing as an asset on the balance sheet, rental payments can be offset against profits.
Operating Leases Or Finance Leases?
To choose between Operating Leases or Finance Leases, there are a few things to think about;
- Do you want to commit to one item long term, or upgrade regularly?
- Are you prepared to handle maintenance and repairs yourself?
- Will you use the item for most of its life?
- Do you want the asset to appear on your balance sheet?
Operating Leases And Contract Hire Summary
- Lease period will be shorter than the lifetime of the item
- It’s basically a rental agreement
- Maintenance is usually handled by the lender, resulting in a reduced risk of ownership