Operating leases: definition
An operating lease is a type of equipment lease where the customer (or 'lessee') rents an asset for a fraction of the item's 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 timeframe.
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 operating leases 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 using operating leases and business contract hire instead of another form of asset finance — for example, because instead of appearing as an asset on the balance sheet, rental payments can be offset against profits.
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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.
Basically a rental agreement.
Maintenance usually handled by the lender (reduced risk of ownership).
Off balance sheet.