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Operating lease

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What is an operating lease?

The costs associated with the purchase and maintenance of a new car, machinery, equipment and tools can be off-putting, or simply unfeasible. You may not have sufficient cash flow for an upfront purchase, or maybe your business would like the flexibility to upgrade your equipment more often. 

For these reasons, many businesses choose to use an operating lease to access essential assets. In an operating lease agreement, the provider will purchase the equipment on your behalf and then lease it to you over a predetermined number of months or years. An operating lease agreement will typically run for a shorter period of time than a finance lease and the asset won't appear on your balance sheet.

Operating leases offer benefits such as cost efficiency and flexibility, making them a great option if your business is looking to acquire assets without the long-term commitment associated with ownership. This kind of finance makes it easier for businesses to access the latest technology or specialist equipment that they might only need to deliver a specific project.

At Capitalise, we work with operating lease specialists to help you source an affordable deal which doesn't compromise the quality of the equipment you need. Just search for funding to get started. 
 

How does an operating lease work?

An operating lease is a contract that allows your business to use an asset without having to own it. A finance provider will purchase the asset on behalf of your business and allow you to use it for as long as you need to in exchange for affordable monthly payments. Once the contract ends, you'll simply be asked to pay the difference between the original price and the residual value upon expiration.

Operating lease example

Here’s an example of how an operating lease would work: 

  1. ABC Company needs the use of a car for their daily operations. They want to be able to upgrade the vehicle in a couple of years. ABC Company doesn’t need to customise the car and wants to avoid the costs associated with owning it, so they opt for an operating lease. 
  2. The business chooses a car valued at £25,000. After a successful funding application, an operating lease provider agrees to lease ABC Company the car over a 36 month period. The agreement includes a mileage limit of 12,000 miles a year and specific costs incurred if they exceed the mileage limit.
  3. ABC Company makes monthly payments of £500 to the leasing company throughout the 36 month term. 
  4. The leasing provider covers routine maintenance costs during the lease term but ABC company is responsible for making sure the car is properly insured.
  5. At the end of the 36 month term, ABC Company has the following options:
  6. Return the car in good condition and within the mileage limit.
  7. Purchase the car at the predetermined residual value of £12,000.

Here’s a breakdown of how the costs are calculated:

  • Monthly lease payment: £500
  • Total lease payments over 36 months: £18,000
  • Additional mileage charges (if any): Variable based on actual mileage
  • Residual value (if purchasing at end of lease): £12,000

Why use an operating lease?

Avoid hefty upfront costs

Protect your cash flow and avoid large upfront payments for new equipment. Choose how long you'd like to keep the equipment for and, as long as you keep up with your monthly payments, you'll have full use without the burden of full ownership.

Fixed, affordable payments

Your monthly payments will be set out in a clear and transparent way before your operating lease agreement begins, helping you to budget and keep on top of your finances.

Accessing specialist equipment

Renting equipment through an operating lease lets you use specialised tools for a set time without buying them upfront, helping you stay flexible and efficient.

Who is an operating lease for?

Arranging operating lease financing can help your business to source assets that may have otherwise been unaffordable. It presents an accessible alternative for a small business that’s trying to grow, but would prefer to invest working capital into other areas.

What kind of assets can I get for my business with an operating lease?

You can use an operating lease to get a variety of assets for your business. Some common assets that businesses lease include:

  • Vehicles: Cars, vans, trucks, or fleets of vehicles for transportation.
  • Office equipment: Computers, printers, copiers, scanners, and other IT equipment.
  • Machinery and equipment: Manufacturing machinery, construction equipment, medical equipment, and agricultural machinery.
  • Furniture and fixtures: Office furniture, fixtures, and fittings for your workspace.

How much does a car operating lease cost?

The cost of a car operating lease can vary depending on several factors, including the make and model of the car, the lease term, mileage limits, and any additional services included in the lease agreement. If you’re considering leasing a car, you could use our Business Loan Calculator to get an estimate of what your monthly repayments could look like. Keep  in mind that the actual costs may vary depending on the specific terms of the agreement.

Operating lease advantages and disadvantages

Advantages of operating leases

  • Operating leases offer flexibility because they typically have shorter terms and don't tie you down for as long as other types of leases. This means you can adjust to changes in your business needs more easily.
  • Operating leases often require lower upfront costs compared to buying an asset outright. This helps conserve your cash flow for other business needs.
  • Since you don't own the asset, you're not responsible for its maintenance and upkeep. If the asset becomes outdated or needs repairs, that's usually the lessor's responsibility, saving you time and money.

Disadvantages of operating leases

  • While the initial costs may be lower, the total cost over the term can sometimes be higher compared to other types of leases. This is because you're renting the asset rather than owning it.
  • With an operating lease, you're only renting the asset for a set period. This means you don't build any equity or ownership in the asset, and you don't get any potential benefits if its value goes up.
  • The lessor could decide not to renew the lease at the end of the term, which could disrupt your business operations.

Are there other options available? 

An operating lease can be a great option for many businesses, but you might want to consider other financing options to see which aligns best with your needs. 

Here are some alternative ways you can fund the purchase of a vehicle or asset:

Finance lease: a finance lease typically provides the option to purchase the asset at the end of the agreement for a predetermined price. This option suits if your business is looking for eventual ownership without a significant upfront investment.

Hire purchase: with a hire purchase agreement, your business will make fixed monthly payments towards owning the asset outright. While this option offers ownership at the end of the term, it requires a larger initial deposit and may include interest charges.

Asset finance: asset finance encompasses various options tailored to different assets, such as equipment loans, or refinancing. This flexibility allows your business to secure funding for essential assets while preserving cash flow.

Business loan: while not specific to vehicle financing, a business loan can be used to purchase vehicles outright. A business loan will give you ownership from the start, but this means that you’ll bear the responsibility of maintenance, depreciation, and eventual disposal.

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frequently asked questions

An operating lease is similar to a rental agreement where the lessor (the lender) retains ownership of the asset and the lessee (the business) pays for the asset's use. An operating lease is typically short-term with and not included on the business’ balance sheet. 

On the other hand, a finance lease resembles a purchase, with the business assuming the risks and rewards that come with owning a vehicle. In a finance lease, the asset is a liability on the balance sheet.

If you’re a UK business, operating leases don’t typically count as debt on your balance sheet. Instead, they’re treated as off-balance-sheet liabilities. 

This means that the lease payments are expensed on the income statement as operating expenses, rather than being recorded as debt. 

However, it's important to note that accounting standards, such as IFRS 16, may require some operating leases to be recognised as liabilities on your balance sheet, depending on specific criteria. If you’re unsure, you can consult with an accountant about how an operating lease is accounted for.

An operating lease on a company car is a rental agreement where a business leases a vehicle from a leasing provider for a set period of time. In an operating lease, the leasing provider retains ownership of the car. The business pays monthly lease payments for the use of the vehicle, typically covering maintenance and other services. At the end of the lease term, the company returns the car to the provider.