An operating lease works differently to a hire purchase. With this type of finance you hire the equipment from the lessor over a fixed term, and come the end of the term, the equipment is returned to the lessor for sale.
This type of agreement suits businesses who only need equipment for part of its working life or will upgrade again soon. The risk and rewards of owning the equipment stay with the lessor which means you don’t have to worry about depreciation or what to do with the equipment at the end of the agreement.
There are three benefits to an operating lease: cost, risk and flexibility. Cost because a residual value is built into the agreement which lowers your monthly payments (you basically pay the depreciation on the equipment plus our fee). Risk because the lessee has no residual value risk. And flexibility because the lessee isn’t tied into owning the equipment long-term (which also makes you more agile).
It is also possible for the lessee to claim capital allowances on an operating lease if the lease is not deemed a sale. Plainly this means the payments you make to lease the equipment can be expensed against your company’s annual pre-tax income.
When you combine the benefits of cost, risk and flexibility, as well as the tax advantages, it’s easy to make a case for an operating lease.
There are two downsides to an operating lease: term and ownership, although whether these are downsides to you depends on what you want. Term because when you enter into an operating lease you commit to keep the equipment for a period of time. And ownership because you will never own the equipment. Regarding the latter, some agreements also give no option to buy outright should you change your mind.
Whether an operating lease for equipment is right for you depends on your average asset lifecycle. If you only need equipment for part of its working life or you operate in an industry where equipment becomes obsolete quickly, an operating lease lets you use the best equipment over a relatively short term without paying the retail price. Come the end of the agreement the equipment goes back, and you then have the option to lease new equipment on a fresh agreement. It is a cycle many businesses use.
If you would rather own the equipment outright after your finance agreement ends, the best finance facility for you is a hire purchase. This agreement has higher monthly payments because there is no residual balloon built in. You pay the retail price of the product plus our fee over a term that makes repayments affordable.
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Is an operating lease for equipment right for you? Whether yes or no, we can help arrange the right finance. Speak to one of our experts today – call us on 01234 240 155 or email us at firstname.lastname@example.org to get started.