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Business Finance

Operating Lease

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The core lease type for businesses as they are easy to set up and don’t require a large commitment.

Asset acquisition is essential in ensuring competitiveness and efficiency for most small-medium Australian businesses. However, acquiring new assets can be a major challenge for many businesses due to the high costs. The large expenses that new assets present can be very daunting, since debt and cash-flow issues present major threats.

What is an Operating Lease?

An operating lease is an agreement where the lender agrees to rent equipment to a business for use over a specified time period. When the lease term ends, the equipment is returned to the lender and the business is not left with the liability of a residual value or any further obligation. Vehicle leases, building leases and equipment leases can all qualify as operating leases.

An operating lease is an asset financing option which can be helpful to businesses since it carries no residual risks while providing access to needed assets.

How does an Operating Lease work?

Businesses essentially sign up to a long-term asset rental by utilising an operating lease. Operating lease arrangements provide your business with exclusive use of the asset during the term of the operating lease. However, the ownership of the asset is not transferred to you or your business, rather it remains with the lender. As a result, operating leases may have higher repayments in regard to maintenance and servicing.

An operating lease may be a suitable financing solution for businesses who want to keep new assets off their balance sheets to take advantage of tax benefits. Operating lease arrangements are also suitable for businesses who need to regularly update assets which quickly become obsolete or depreciate such as vehicles, computers and IT equipment and do not want to worry about residual value and risk.

The advantages of Operating Leases

  • Allows you to preserve working capital
  • Gain access to the latest equipment and technology without the risks associated with ownership
  • Eliminate the risks residual value of obsolete equipment
  • Flexibility to frequently upgrade assets and respond to changing customer and market demands
  • Rental payments may be tax deductible if you use the asset to generate income
  • May be able to claim input tax credit for rental and other charges that are subject to GST
  • Option of all-inclusive fixed payments to cover all maintenance and other operating costs associated with the asset
  • Great for assets that depreciate too quickly or become challenging to get rid of at the end of a term i.e. tech equipment, medical equipment

How long is the term of an Operating Lease?

In line with other types of business asset finance, the term of an operating lease varies greatly depending on the lender. Factors which will impact the term of lease include:

  • The value of the asset
  • Purpose of the asset
  • condition of the asset

As a general guide, the term of an operating lease will be shorter than the estimated useful life of the asset, which typically ranges between one and five years.

‍Finance Lease Vs. Operating Lease

In a lease agreement, ownership of the asset is retained by the business at the end of the lease agreement, typically following the payment of a balloon or residual sum. Whereas at the end of an operating lease arrangement the asset or assets are returned to the lender.

‍How many business assets can be included in an Operating Lease?

There is no specified minimum or maximum number of assets which can be included in an operating lease. Additionally, there is not usually a limit in regard to the value of the assets which will be included in the operating lease. Although, some lenders may require a minimum operating lease amount.

Your businesses’ financial circumstances and what you require in terms of assets is what should be key in determining the number of assets which you may want to include in the operating lease.

What types of assets can be financed under an Operating Lease arrangement?

The types of assets which can be financed through an operating lease varies depending on the lender. It is important to ensure that the type of assets you wish to include in an operating lease are eligible, so be sure to speak to an experienced finance consultant.

  • Passenger vehicles and SUV’s are the most common types of asset acquired through an operating lease.
  • Heavy commercial vehicles and commercial equipment are also popular and may be included in an operating lease by some lenders
  • Technology equipment including computers, printers, copiers and security equipment are also available through operating leases

Different types of Operating Lease arrangements.

There are three main types of operating leases:

FULLY MAINTAINED OPERATING LEASE

A fully maintained operating lease usually includes reporting, accident management, all costs associated with the servicing and maintenance of the asset as well as the management and payment of other ongoing considerations depending on the type of asset.

This operating lease arrangement is suitable for businesses that want to outsource the ongoing management of their asset and want to benefit from combining all operating costs coupled with the assets into a single fixed regular payment

NON-MAINTAINED OPERATING LEASE

Contrastingly, a non-maintained operating lease involves a variable ongoing lease repayment amount. The lease payment in relation to the cost of the asset will typically remain fixed, however any additional costs usually associated with maintaining the asset will be charged as they are incurred, which may result in a varying monthly payment.

SALE AND LEASEBACK

Some lenders offering operating leases will agree to purchase business assets that you have already purchased, and then lease them back to you under a normal operating lease arrangement. A sale and lease back arrangement can benefit businesses’ that have already purchased assets but have realised the benefits presented by entering into an operating lease arrangement. Once the asset has been sold back to the lender; it is removed from the business’s balance sheet. Once the new agreement has been finalised, ongoing repayments are made from the borrower to the lender, which are usually tax-deductible.

Is my business eligible for an Operating Lease?

You will need to prove to the lender that you can meet the ongoing repayments of an operating lease. To do so, you should be able to provide:

  • Business finance documents including, current financial situation, cash flow, assets and debts.
  • Good credit history
  • Provide your Australian business number (ABN)
  • Business operating for minimum 2 years

How do I apply?

You can apply for an operating lease by submitting a simple online application. If you would like to know more or need assistance determining the best equipment financing solution for you, one of our experienced finance consultants are happy to assist, contact us today.

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