What is an Operating Lease?
An Operating Lease is essentially a short to mid-term rental agreement whereby the customer (or Lessee) rents an asset for a fixed portion of its useful life. The Lessee does not take ownership of the asset, nor do they assume the risks (such as maintenance costs) and benefits of owning it. This type of agreement is generally more suited to assets that may become obsolete quite quickly, such as computers and IT equipment.
What are the benefits of an Operating Lease?
The main benefit of an operating lease is that your business can commonly upgrade the assets purchased within the lease period. Depending on the accounting method used by the business (cash or accrual), you may also be able to claim GST on the monthly rental payments (check with your accountant before deciding if this is the right option for you). An Operating Lease can be more cost effective than purchasing equipment with a short lifespan.
What are the disadvantages of an Operating Lease?
The Lessee cannot sell or modify the asset without the Lessor's permission. On expiry of the lease, the terms of that lease are void and the Lessee may need to renegotiate the lease with the Lessor each time
What is the difference between an Operating Lease and a Finance Lease?
The main difference between an Operating Lease and a Finance Lease relates to the operating costs of the asset. Under a Finance Lease, the Lessor is responsible for the maintenance and other ancillary expenses, whereas these costs are included in the monthly repayments of an Operating Lease. In addition, at the end of the term, a Finance Lease provides the Lessor with the option to purchase the asset while an Operating Lease does not and the business is required to hand the asset back to the lender