An operating lease is a form of asset finance that allows you and your business to get access to an asset of your choice while spreading its cost over a pre-agreed period.
Like our other forms of available asset finance, an operating lease is a useful facility for businesses who need access to expensive vehicles, machinery or equipment without purchasing outright.
Operating leases function much like a finance lease, but have their own associated benefits and drawbacks when utilised incorrectly, so it’s vital to understand how an operating lease works and whether this is right for your business.
Find out more about operating leases below, or contact our team with your specific requirements to get guidance on whether an operating lease is right for you.
Need help? Call us on 0191 410 4776
What is an operating lease?
An operating lease is a form of asset finance that gives your business the ability to access expensive business assets without paying for them outright.
Under an operating lease agreement, you or your business will not own the asset – it will remain the property of the lessor (leasing company) throughout the payment schedule and will return to them at the end of the agreement.
An operating lease agreement is often used for assets that are likely to have a high residual value, such as large, expensive or specialist vehicles or heavy machinery.
The residual value of the asset is estimated when the operating lease terms are agreed upon, and the risk of estimation sits with the lessor. Even if the actual value of the asset at the end of the agreement varies from the estimation, the lessee (you) will not bear the risk of additional payment.
Under an operating lease, the agreed monthly payments do not cover the entire cost of the asset or assets but are calculated based on the original purchase price and forecasted residual value. Other services, such as vehicle or machinery maintenance, can be included within the operating lease terms, depending on your requirements.
Operating leases have a distinct financial impact, particularly on a company’s balance sheet and cash flow statement. Unlike finance leases, operating leases are treated as off-balance sheet transactions, where the leased asset and corresponding liability do not appear on the lessee’s balance sheet.
Instead, lease payments are reflected as operating expenses in the income statement and deducted from the company’s cash flow. This approach can enhance financial metrics like return on assets and debt-to-equity, making operating leases an appealing choice for businesses.
Tax consequences linked to operating leases may vary based on specific circumstances and tax laws. In the UK, lease payments for operating leases are typically considered tax-deductible expenses, reducing the company’s taxable income. This can result in substantial tax savings, especially for businesses with high lease payments. Nevertheless, it is crucial for companies to seek advice from tax experts to ensure compliance with tax legislation and rules.
Rights and responsibilities in an operating lease agreement
An operating lease agreement involves specific rights and obligations for both the lessor and lessee to uphold, aiming to safeguard the interests of both parties and establish a balanced lease arrangement.
The lessor, being the asset owner, is entitled to receive lease payments from the lessee as compensation for the asset’s use during the lease term. Additionally, the lessor retains asset ownership throughout the lease, granting them the authority to enforce lease terms and take legal action in case of non-compliance.
Conversely, the lessee, who leases the asset, has the right to utilise the asset for the agreed-upon lease term without ownership responsibilities.
However, the lessee must adhere to lease terms, make timely payments, maintain the asset, and comply with regulatory requirements.
Upon lease expiration, the lessee typically returns the asset in good condition, subject to normal wear and tear, ensuring the asset’s value for future leases. There may also be an option to purchase the asset, based on the lease agreement terms.
Both parties share the responsibility of maintaining and ensuring the leased asset through regular inspections, repairs, and adequate insurance coverage to mitigate risks. Compliance with regulatory standards, including health and safety regulations, is a collective obligation.
The legal framework governing operating leases in the UK incorporates accounting standards, regulations, and laws to ensure transparency, accountability, and fairness in lease transactions, safeguarding the rights of lessors and lessees.
Why choose an operating lease?
There are a number of advantages of an operating lease that make it a useful facility for any business looking to grow and operate sustainably. By spreading the cost of your asset, you can retain a consistent cash flow month-on-month, keeping working capital aside for business improvements or to tackle unforeseen issues.
A healthy cash flow means a competitive advantage and the fixed monthly payments as part of an operating lease allow for far simpler budgetary calculations. This level of flexibility is helpful for start-ups or SMEs, which might not have the same capital available to invest in expensive assets outright.
Though your business won’t own the asset, this means there’s less risk tied to you – the risks of ownership are handled by the leasing company. This also means that any maintenance responsibility also falls to the leasing company, rather than you, the lessee.
Is an operating lease right for me?
An operating lease might not be right for everyone. The nature of this kind of agreement means that there are a number of potential disadvantages of an operating lease to be aware of.
The primary potential disadvantage of an operating lease is that your business will not own the asset at any point during the agreement. Should you wish to own the asset at the end of the agreement, a different plan, such as hire purchase, is likely better suited to you.
While limited ownership rights may be a disadvantage for some, it can be a benefit for others. If you need funding to access an asset that will be replaced in the medium-term future, such as a vehicle that will be updated to a newer model, an operating lease could be perfect for you.
Securing your operating lease agreement
Securing the right asset finance agreement has never been simpler at Anglo Scottish. We’ll work with you to understand your business and your requirements and establish whether an operating lease agreement is right for you.
Thanks to our unique panel of over 70 funders, we can offer a wider range of lending terms and arrangements than traditional funding institutions.
Once you know which asset you need to finance, get in touch, and we’ll work with you and our funders to provide the best terms available. If you’re happy with the arrangement and sign with us, we’ll carry out a final check, and then you can get access to your finance.
HOW IT WORKS
Decide
DECIDE
Decide on the asset you need to help your business grow
Talk
TALK
Talk to us, tell us about your business and the asset you wish to acquire.
Approval
APPROVAL
We will reach out to our panel of lenders on your behalf to gain approval.
Sign
SIGN
Sign your document, once approved we’ll send you your documents to sign. After which we will transfer payment to your asset supplier
Final checks
FINAL CHECKS
We’ll do a final check to make sure everything is running smoothly, and you can start reaping the benefits of your new asset.
CASE STUDIES
Contact us
So, if you’re looking to grow your business sustainably and spread the cost of the asset you need, an operating lease could be the perfect method for your business.
However, our team of expert advisors are on hand to ensure that we connect you with the right finance agreement for you, whether that’s an operating lease, another form of asset finance, or a traditional commercial loan.
Contact us today to discuss your business, your goals and requirements or simply to find out more.
Need help? Call us on 0191 410 4776