An operating lease is a contract that allows for the use of an asset but does not convey ownership rights of the asset.
Essentially, what this means is that the lessee can use the equipment over a fixed term, but there is no option to buy the asset at the end of the term.
Operating leases are counted as off-balance sheet finance. What this means is that any leased asset and associated liabilities are not included on the company’s balance sheet, protecting the ratio of debt to equity.
An operating lease will typically run for less than the full economic life of the asset being leased. This means that the lessor would expect the asset to have a resale value at the end of the lease period – this is known as the asset’s residual value.
This residual value will be forecast at the start of the lease and the lessor takes the risk on whether the asset will achieve this residual value or not when the contract comes to an end. An operating lease is often found where the asset has an inherent residual value such as vehicles and machinery.
The lessee gets the use of the asset for the agreed period in return for scheduled payments. These payments do not cover the full cost of the asset, as they would do with a finance lease. The lessee could also continue to rent the asset after the original agreement term at a reasonable market rental price, which would be agreed at the time.
An operating lease can also be known as ‘business contract hire’, this is particularly common for commercial vehicles.
If you want to see how Kennet can help you and your business with operating leases or any other type of finance or leasing, get in touch with our friendly team by calling us on 01675 469200 or by clicking the link below.
