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- An operating lease is very beneficial for companies who require equipment that can become outdated quickly.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.