Asset Finance - Operating Lease
An Operating Lease is a cross between a standard finance lease and a contract hire agreement primarily used for short or medium-term funding periods, allowing the use or hire of an asset without the risks associated with depreciation. This is particularly suited to new goods/equipment financed on short or medium term contracts, where the asset has a strong secondary market value and is likely to be replaced immediately at the end of the agreed term, or where the asset has been acquired to service a particular contract for a matching period.
Specific Benefits
- Rentals may be lower than instalments on a Hire Purchase or Finance Lease, as they can reflect the effect of the lessor claiming capital allowances and only the lessor depreciation is amortised. The goods/equipment are never the property of the lessee and the lessor takes substantially all the risks and rewards in the future value of the asset.
- The operating lease is an ‘Off Balance Sheet’ financial instrument.
- Cash flow is improved over that of a hire purchase facility as the VAT element of an operating lease is based on the net rental amounts, as and when they fall due for payment.
- In certain circumstances, the lessor may assist in securing greater discounts on the goods (due to their bulk purchasing power) than would otherwise be achieved by the customer on their own account, leading to a reduction in rental costs to the customer.
Variations
Sale & Leaseback - Sale and Operating Leaseback is an option that releases cash back into a business through the sale and retention of previously owned fixed assets, or can be used when a customer has recently bought goods/equipment themselves and wishes to return the capital to the business. This facility allows the sale of assets that you already own (to an agreeable Bank/Finance company) in return for a cash lump sum. This is particularly useful in situations where goods/equipment have been bought on advantageous terms or where management wish to inject additional capital back into the business.
Benefits
- As with all finance options, the lease contract will give a known term and fixed payments, and capital is conserved for more profitable use elsewhere in the business.
- Cash flow can be managed by tailoring the financial product to the customer requirements and the granting of specific finance preserves the customer borrowing ability by giving an additional line of credit.
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