What is an operating lease?
An operating lease is similar to a finance lease in that your business can have full use of an asset without having ownership. The key difference compared to a finance lease is that an operating lease will end before the assets useful lifetime runs out. This is because the lessor will expect the asset to have a resale value at the end of the agreement.
The monthly payments do not cover the full cost of the asset. Instead, repayments are calculated based on the original asset price and the residual value (the amount the asset is expected to be worth at the end of the lease). When the lease is up you will return the asset and the leasing company will then sell it in order to release the residual value.
An operating lease is most appropriate for assets that are likely to hold value, such as vehicles and machinery.
Operating lease vs finance lease
As well as the lease expiring before the end of the asset’s lifetime, the main differences with operating lease compared to finance lease include;
|Operating Lease||Finance Lease|
|Risks and rewards including maintenance and financial benefits||Does not transfer from the lessor (leasing company) to the lessee (user of the asset).||Transfers from the lessor (leasing company) to the lessee (user of the asset) when the asset is transferred.|
|Length of agreement||Shorter as the agreement will run out before the end of assets useful lifetime.||Longer as the lease will run for the majority of the assets useful lifetime.|
|Ownership||No option of ownership at any point in the agreement.||Ownership of the asset is transferred to the lessee at the end of the lease term if they choose to pay the residual value.|
Find out more about taking out a finance lease through Luna Finance.