What is an operating lease?
An operating lease is when you pay to use an asset but do not gain ownership of it. A common example of this would be renting a property. An operating lease works as monthly payments over the agreed amount of time. Although similar to a finance lease in some ways, the main difference is that the responsibility of the asset remains on the lessor and not you the lessee. The lessee does not have the purchasing options at the end of the contract. Operating leases offer a lot more flexibility to you and your business than some financing options, therefore you are able to upgrade and change the assets you have access to more often.
How does an operating lease work?
An operating lease is very similar to renting. Monthly payments are taken as the expense of operating the asset. This allows you to rent and operate the asset but ownership remains with the lessor. Operating leases differ to finance leases in that the contract does not end with the transferral of ownership. Therefore, monthly payments do not add up to paying off the asset- an operating lease is purely the cost of using the asset during the agreed time frame. A finance lease must be recorded in a businesses accounting system whereas an operating lease is known as an “off the balance sheet lease”.
What is an operating lease good for?
Operating leases are useful for businesses who might want to change or upgrade their equipment more often than the life span of the desired asset. This allows businesses to terminate contracts and opt for a different machine or vehicle when they require.
Operating leases are seen as more of a short term contract than a finance lease. The flexibility available to you in an operating lease is the biggest appeal for a lot of businesses as well as the fact that responsibility of maintenance and care still lies with the lessor. Operating leases are normally used for vehicles including aircraft and large, complex machinery. Businesses that require the usage and access to these types of assets can manage monthly payments and avoid huge financial investments.
Why should I choose an operating lease?
An operating lease could be a good financial choice for your business if you may want to upgrade the technology or equipment that you use often. These types of payments allow you to use the chosen asset whilst required but also gives you flexibility. Operating leases can enable your company to keep from recording an asset on your balance sheets as payments can be deducted as operating expenses. For this reason operating leases can be an
appealing option for your business. If you are considering an operating lease in Scotland then Parkins Finance can help guide you through it. If you require large machinery, vehicles or another large financial investment that you could benefit from managing in monthly payments then our expert finance brokers are here to help. Our team has years of experience behind them and will help you arrive at the best decision for you and your business.