5 min read
An operating lease is a form of rental that suits businesses wanting the use of an asset for a defined period, without taking on the risk of its value once that period ends.
What it is
Unlike hire purchase or a finance lease, an operating lease covers only part of an asset's useful economic life. The finance company retains the residual value risk, expecting to lease or sell the asset on again once the agreement ends, so rentals are calculated only on the value the asset is expected to lose during the lease term, rather than its full purchase price.
This typically results in lower rentals than a finance lease or HP agreement covering the same term, because the business is not paying towards the full cost of the asset.
Who it suits
- Businesses that want the latest equipment and expect to renew regularly
- Operations wary of exposure to second-hand values on fast-depreciating assets
- Companies wanting to keep fixed assets off their own balance sheet, subject to their accountant's assessment under the applicable standard
- Contractors taking on time-limited work where a short-term rental fits better than a purchase
How it works
The finance company estimates the asset's residual value at the end of the lease term and rentals are calculated to recover the difference between cost and that residual value, plus interest and charges.
- Rentals paid throughout the lease term, with VAT charged as you go
- The asset is returned to the finance company at the end of the term
- The business is usually responsible for maintaining the asset to an agreed condition
- There is no automatic option to purchase, though this can sometimes be arranged separately
Typical terms
| Term | Typical range |
|---|---|
| Term length | 12 to 60 months, usually shorter than the asset's full working life |
| Deposit | Often minimal, sometimes one rental in advance |
| Payment frequency | Monthly or quarterly |
| End of agreement | Asset returned in agreed condition; no automatic ownership transfer |
| Security | The asset itself |
Pros and trade-offs
Where it works well
- Lower rentals than agreements covering the full asset cost
- No exposure to residual value risk
- Straightforward to renew with newer equipment at the end of term
- Maintenance packages can sometimes be bundled in
Trade-offs to weigh
- No automatic route to ownership
- Return conditions and wear-and-tear terms need to be understood upfront
- Total cost over successive renewals can exceed ownership if the asset is kept long term
Worked example
Worked example: three-year plant rental
- Asset cost
- £82,000 plus VAT
- Estimated residual after 36 months
- £38,000
- Term
- 36 months
- Indicative monthly rental
- Approximately £1,320 plus VAT
- End of term
- Asset returned; new lease can be arranged for replacement equipment
These figures are illustrative only, based on an assumed residual value and rate, and are not a quotation.
If you would like to see how an operating lease compares with buying outright for a specific asset, our team can put together an indicative comparison.
Next step
Talk through the numbers with us
Send us the details of the asset and we will come back with an indicative figure and a properly structured option from the funder panel. No obligation, and no pressure to proceed.