Written byShaun McGowan
The main benefit of choosing an operating lease for business finance is that your business can commonly upgrade the assets purchased within the lease period. This is highly beneficial for businesses purchasing IT equipment, as these types of assets often become obsolete within a few years. Your business can also claim tax on your rental payments.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
An operating lease is a type of business equipment finance in Australia. An operating lease is used for short-term low-value assets — e.g. laptops or phones — and provides greater options for upgrading and re-leasing the asset at the end of the lease than when using a finance lease.
An Operating Lease, or Equipment Rental Agreement is a type of equipment finance rental agreement, where a lender will purchase an asset on behalf of a borrower and rent it out to them over a period of time.
An Operating Lease is similar to most types of rental agreement — your business makes fixed monthly payments to use the asset — but offers greater freedom to the borrower in upgrading the asset throughout the lease term.
Similar to a commercial hire purchase, a lender will buy the asset from the vendor on your behalf, and will then rent it to you in exchange for regular payments. In most cases, you’ll be able to get a tax deduction for your lease payments.
However, as the lender will retain ownership and full responsibility for the asset, you may find operating leases have higher repayments to account for servicing and maintenance.
All types of business asset lease allow a business to access business equipment through regular finance repayments. The main difference between an operating lease and other types of lease is what happens at the end of the lease term — an operating lease will see the asset returned to the lender.
Ownership of the property is retained during and after the lease term by the lender.
Running Costs & Admin
The lender is responsible for all associated costs, which are often included in the lease repayments.
Accounting & Tax
Only the lease payments are listed as a business expense on profit and loss statements. Payments are generally tax-deductible.
Businesses use an operating lease for assets that may quickly become obsolete — such as computers and IT equipment — and when it is more beneficial to upgrade the equipment than own it outright.
An operating lease may often be more expensive than purchasing an asset outright, however you will not be required to take ownership of the asset at the end of the lease. In fact, you will generally have the option to upgrade the asset, either at the end or throughout the lease term.
Operating leases are also used when a business wants to include all costs for asset rental in its regular repayments. Using an operating lease will ensure you aren’t caught out if something malfunctions or needs to be repaired, and offers a more accurate forecast of repayment amounts.
You can apply for an operating lease the same way you would for most equipment finance applications. You can qualify for an operating lease if you:
There are two main types of applications, which will depend on the amount you wish to borrow. If you are borrowing less than $100,000 the approval process will be fairly simple. Most times, just your business bank statements will be sufficient to illustrate your monthly business revenue.
If you wish to borrow more than $100,000, your lender will require additional documentation to assess your application.
If this is the case, you’ll need to provide additional documentation to the lender so they can better assess your application. Here’s what you may need to provide to a lender when applying:
If you are making an application for more than $100,000, you can speak to your bank or a lender directly to discuss your financial circumstances and need for finance.
If you are applying for less than $100,000, you can generally apply online with a number of different specialist business finance lenders, including those who provide leases designed specifically for small businesses.
You can use the Money.com.au smart form to compare offers from real Australian lenders and apply directly from your results. These lenders offer the fastest approval speed in return for charging higher interest rates than a bank.
Primarily the difference between the two types of lease are what will happen at the end of the lease term. With an operating lease, you will either return the rented equipment, or negotiate new terms with your lender at the end of your existing loan contract.
One of the most popular examples of an operating lease is in acquiring IT assets, such as laptops or cellphones. These are often financed through an operating lease as doing so allows the borrower to upgrade the equipment throughout the term.
At the end of an operating lease, you will generally return the asset to the lender, who will in turn refinance the assets to another borrower. This is one of the clear benefits of an operating lease, where there is no responsibility of the borrower to maintain ownership or dispose of the asset at the end of the lease term.
You may be able to acquire a vehicle through an operating lease, however there will generally be more suitable options available to businesses. You can learn about financing business vehicles or read our comprehensive guide on the most popular form of business car finance, a chattel mortgage.
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.