Popular in public sector (for instance the only form of leasing permitted for education establishments) and with corporates looking to finance off-balance sheet.
How Does It Work?
The definition of an operating lease can be subjective and we always recommend you getting your own Auditors approval but essentially the funder will take what is termed “risk and reward” in the assets financed.
In practice this means that the funder sets a residual value for the goods - in other words a value that the funder will want to realise at the end of the agreement – and you pay a rental based upon the balance plus interest over your chosen term.
A core principle of a true operating lease is that you do not intend to own the equipment and that it is returned to the funder at the end of the agreement.
This form of agreement is attractive to those private businesses wishing to keep the agreement off their balance sheet (it is a simple Profit & Loss cost) or for public sector entities needing a compliant finance vehicle.
At the end of the agreement the assets should be returned to the funder and it is their responsibility (“risk and reward”) to recoup the best value they can at that point.
- Off balance sheet
- Lower rentals (given residual value)
- Goods must be returned to funder
- Only available for certain assets (those with strong residual values)