What is an Operating Lease?

Apr 27, 2016 | Equipment Leasing

An operating lease is a short-term equipment lease. It is considered short-term relative to the useful life of the equipment and is usually used for big equipment with a long useful life span.

Operating leases are used for all types of equipment to acquire an expensive piece of equipment that a company would not otherwise be able to afford. An operating lease is usually used to obtain equipment for a fixed term at a lower payment. An operating lease is treated like renting — payments are considered operational expenses and the asset being leased stays off the balance sheet.

Operating Lease Benefits

  • Operating leases are accounted for as a rental expense and are “off balance sheet financing” since it is considered an operating expense.
  • Leasee does not assume risk of ownership with an operating lease.
  • The lessee has several options at the end of the lease including purchasing the equipment, extending the lease or upgrading the equipment.
  • An operating lease typically has lower payments than a traditional loan.
  • The total cost of the equipment can be financed requiring less cash up front which can be very helpful if your cash flow is tight.
  • An operating lease can offer flexible payments allowing for changes in your finances.
  • An operating lease is very beneficial for companies who require equipment that can become outdated quickly.

For example a medical lab needs medical equipment and software. The Equipment costs $500,000 to purchase and has a useful lifespan of 25-years. The medical lab does not have an extra $500,000 in order to purchase the equipment and would like to refresh the equipment every 5-years. Additionally, based on their income projections for the next several years they could really benefit from a reduction in their net income. Given these factors they consider a lease. They are able to obtain a fixed rate operating lease with a 5-year term and now have the equipment they need.

Get more information on operating leases here.

Deanna Milsap

Deanna Milsap

Deanna is an expert at helping companies get the equipment they need and has a proven track record with a 23 year career in the Equipment Leasing industry. Her background includes all aspects of lease documentation, administration, credit review, remarketing and operations. Deanna’s extensive experience and training in equipment financing enables Tetra Corporate Services to complete legally compliant and uniquely customized transactions in a short period of time. Prior to joining Tetra in 2009, she worked as Vice President of Documentation for several other Equipment Leasing companies in Utah and southern California.

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