Leasing is a vital business financing aspect. It offers some rights to you as the lessee allowing you to utilize the asset to its maximum potential.
With an operating lease, the leasing company will then rent out the asset to you, as long as you continue making regular payments to them. During this period, the equipment is still owned by the leaseholder (leasing company).
Businesses take out leases on equipment for a variety of reasons; key among them is trying to acquire particular assets when the financial resources cannot allow you to own it.
For a business, taking out a lease may be a more economical option as compared to outright buying. However, there are some businesses that prefer leasing assets even when the funds are available for making that purchase.
This is because the benefits they enjoy from an operating lease are:
- They are able to effectively control their cash flow as they make manageable monthly lease payments, compared to one large purchase.
- The money saved on making one large expenditure can be used for various business operations
- Leasing does not tie up one’s line of credit
What Is An Operating Lease?
An operating lease, also referred to a service lease, is used for short-term leasing and mainly for assets that are very expensive.
The lessee uses the equipment but the lessor retains ownership, taking on the benefits and downsides of owning the asset.
An operating lease is usually found where the assets do not have any residual value. The business as the lessee gets to keep the asset for the agreed period in return for rental payments. The payments, however, do not cover the full value of the asset as is the case in a Capital Lease.
The payments, however, do not cover the full value of the asset. If they did, that would qualify as a Capital Lease.
In some cases, operating leases may have other services incorporated into the agreement such as a maintenance fee. Once the lease contract has run its course, the lessor will re-hire in a different contract or sell it for its full value.
How Can A Business Acquire Assets Through Leasing?
In the event that your business would like to acquire an asset with an operating operation lease, you can undertake any of the following options:
- Getting the asset by engaging directly with the leasing company: In this case, the leasing company provides your business with the asset and facilitates the lease. Before finalizing the contract, it would be wise to seek advice from a third party such as a legal advisor.
- Identifying the equipment then looking for financing through a lessor: With this approach, you find a desirable asset at a vendors shop. You then make an agreement with the lessor. The vendor will offer your business the needed service and support.
- Organizing a lease arrangement with a retailer or manufacturer with lessor subsidiaries: After talking with a producer or trader, you agree on a selling price with the affiliates. The affiliates then convert the price into an operating lease contract based on the sale terms.
Advantages Businesses Can Enjoy From Operating Leases
An operating lease can save your business money because you can be able to:
- Acquire quality assets at a reasonable price: When leasing an asset, its ownership still lies with the leasing company, and you as the lessee only pay the rental costs. Your business can then acquire quality assets that will not end up breaking down and costing the business a lot in repairs.
- Gain tax benefits from the government: An operating lease payments or leasing expense are considered as operating costs, and thus are tax deductible in your financial statements. This has a positive effect on your business’ bottom line.
- Utilize your capital effectively: When a company decides to take out an operating lease on asset instead of buying the asset, it releases money for the business to spend on other critical areas. Even for a start-up, you minimize your capital expenses which go a long way towards saving money for your business.
It is important to note that an operating lease is not a loan, so you do not pay ‘interest’ in the usual fashion. Instead, you pay for the right to use the asset. The costs in an operating lease depends on the following factors:
- Your business history
- Your credit history
- Length of the lease
- How well the equipment maintains value
You can learn more about how an operating lease works and its benefits by checking out the video below.
Leasing is a good option for financing certain aspects of your business. Operating leases allow you to save money and use that saved money to expand your business operations.
In addition, it also allows your business to adapt to ever-evolving technologies by enabling you to use the latest assets in the market.
Before you sign a contract with a leasing company, make sure you are comfortable with the leasing terms. Be sure to insist that the lease agreement has added provisions for onsite maintenance services, modern asset swaps and determine the total expense of the lease.
Do you think operating leases can help your business save money? Share your thoughts with us below.