Could your business benefit from an operating lease?

Leasing is an important finance facility in the UK retail sector and off-balance sheet operating leases are a major source of funding.

Be it to acquire a van for local deliveries or a state-of-the-art POS system for a shop, an operating lease gives businesses access to high-end equipment and high-ticket items they would otherwise not be able to afford outright.

What’s an operating lease?

An operating lease is a short to medium term finance agreement (typically 12 to 24-months, although some can extend up to 60 months) where a business hires or rents an asset from a finance company. The lessor retains all rights of ownership, so the risk and rewards of owning the asset stay with the lessor. In simpler words, an operating lease is an agreement to rent an asset without a buyout option.

The benefit to the business is it gets to use the asset for a fixed fee and upgrade and replace whatever the asset is at the end of the agreement. The business will also pay less over the term than they would with a hire purchase because they are only paying off a fraction of the total price of the asset. This is because a residual value is built into the agreement. This can be as much as 40% of the asset purchase price.

The downside is the business will never own the asset, although whether or not this is actually a downside depends on the needs of the business and the asset in question. Some assets, like commercial vehicles and upgradeable technologies, are prime candidates for an operating lease because they eliminate the risk of unpredictable resale and residual values, which stay with the lessor indefinitely.

What are the use cases?

An operating lease is a good option for purchasing an asset you do not want to own, because you only pay for the proportion of its life you rent it over. In contrast, a hire purchase is a good option for purchasing an asset you do want to own because it allows you to spread the cost to make it affordable.

Operating leases are widely used in retail to buy state-of-the-art POS systems, consumer technologies like tablets and automated checkout systems. Vehicles like delivery vans, cars, scooters and bicycles can also be purchased on an operating lease because these assets have a finite lifecycle. If your retail business makes use of technologies or assets which are replaced every few years or sooner, an operating lease fits.

We would say if your business requires high ticket equipment which will be upgraded or that which you cannot afford to buy outright, an operating lease is a viable finance option available to your business. The key thing to remember is you will effectively rent the asset without a buyout option. If that works for you, look into it.

Good luck!