An operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value.
The lessor carries the risk associated with the residual value of the asset at the end of the lease.
This type of lease is often used when the asset is likely to have a resale value, e.g. transportation assets. The customer gets the use of the asset, sometimes along with other services. Operating leases are particularly attractive to companies that frequently update or replace equipment and want to use equipment without ownership.
The most common form of operating lease in motor finance is contract hire, particularly in the provision of vehicle fleets.
Key Features and Benefits
Preserves cashflow – offers the obvious cashflow benefits of paying in instalments.
Initial deposits – can be as low as one monthly rental down with the VAT spread over the term of the agreement.
Competitively priced – the Funder or manufacturer takes the risk in the residual value of the equipment and factors this into the rental, bringing down the periodic cost to you.
Fixed maintenance contracts – can also be built in to the monthly rental
Tax efficient – the rentals can normally be offset against taxable profits
Asset normally treated as ‘off-balance sheet’ (subject to your auditors’ approval).
Flexible – at the end of the term, you can return the asset or extend the period. Either way, you do not carry the problem of disposal of the equipment.
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