A guide to operating lease agreements

A guide to operating lease agreements

Business Finance, News

Whether you have been trading for many years or are just starting out, there is always a risk that your essential equipment could need replacing. There are many options for financing the new equipment, with many businesses choosing an operating lease agreement. This article is a helpful guide to operating lease agreements.

What is a business operating lease?

A business operating lease is a rental agreement, which involves the lessee renting the asset for a certain period of its useable life. In general, the period will usually be 12, 24 or 36 months, although this can vary to suit your business. A business operating lease is also commonly referred to as business contract hire, although this usually relates to vehicle leases.

When should a business use an operating lease?

If your business uses equipment which needs updating regularly, it may be more cost-effective to hire assets for a short period of time. For example, leasing a car will ensure you always have the latest model on the road. However, it is worth noting that with operating leases there is no option to purchase the asset at the end of the rental agreement. If you are looking to own the asset at the end of the agreement, a finance lease agreement is likely to be a better fit.

In addition to owning the asset at the end of a finance lease, there are also benefits when it comes to accounting. For example, a finance lease is considered a form of loan and the asset is included on the business balance sheet. This means the business is able to claim both interest and depreciation.

Should my business take out an operating lease or a finance lease?

If you need to replace equipment, you should consider your exact requirements and your budget. Finance leases are often used as a means to purchase expensive items of equipment, such as machinery, plant equipment and vehicles, which means the agreements may not be suitable for low-value assets.

If your business only has a short-term requirement for a piece of equipment, such as a specialist printer, a 12-month operating lease could be the ideal option. However, if the equipment is an item which you will continue to use, a finance lease could prove to be more economical.

Operating lease agreements – where to find out more

If you need help securing lease financing for your SME, please get in touch with us. We enable companies across the UK to acquire much needed capital equipment through leasing and can offer financing for many different requirements from asset finance to business expansion and invoice financing.

Find out about the different types of finance we can provide on our Alternative Finance page or read our guide to the Customer benefits of leasing.

Image by: andibreit via Pixabay

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