
An operating lease is a form of equipment lease where a business (or 'lessee') rents an asset over a specified timeframe - Also known as an 'op lease' this product allows a business to rent an asset for a portion of it's useful life.
An operating lease is perhaps the simplest form of equipment lease, where the risks and rewards of owning the asset (such as depreciation and maintenance costs) remain with the owner (or 'lessor').
How might an operating lease work for my business?
Your business will benefit from lower fixed monthly costs because the rental calculation will account for the residual value of the asset. Upfront costs also tend to be low with no deposit or VAT due at the outset. Instead, VAT is spread across the length of the agreement.
Typically, an operating lease will include some form of maintenance provision and run over a shorter term than a finance lease or hire purchase agreement, giving greater flexibility.
Shorter agreement terms allow for regular replacement/upgrading of the underlying asset - This works particularly well with technology equipment helping businesses keep pace with advances in computers, laptops, mobiles, data servers etc.
At the end of the term the lessee can either hand the equipment back to the lessor or continue renting based on a fair market value, subject to the lessor's agreement.
Are there any other useful benefits?
An operational lease also has certain tax benefits when compared to finance lease or hire purchase e.g. an op lease is not treated as an asset on your company balance sheet and the rental payments can be offset against profits.
Summary
An operational lease is a rental agreement between a lessor and lessee.
The lease term will generally be shorter than the useful life of the underlying asset.
Ownership risks such as depreciation and maintenance typically remain with the lessor.
An operational lease is tax efficient with rentals treated as a business expense.
VAT is spread across the agreement term, keeping upfront costs down.
Want to know more?
Get in touch with the team at KeySME today - We can talk you through your options, the benefits of operational lease and most importantly . . . how this type of funding can boost your business!
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