Operating lease

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

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.

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.