Operating Lease Solutions

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.

Operating Lease Summary:

• Cost-effective finance for equipment with a short lifespan
• The business can’t sell or modify the asset without the lessor’s permission
• When the lease expires, the terms of that lease are void. The business will often need to renegotiate another lease under new terms
• You can usually upgrade your equipment during the lease term
• Your lease payments will generally be tax-deductible
• You cannot claim depreciation on the asset during the lease
• You are only renting the asset and there is no guarantee of ownership or the option to purchase at the end
• Can be more expensive than other finance options if maintenance and servicing costs are included in repayments

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.

If you don’t meet the above criteria, you can still get approved if you:

• Are self-employed or a sole trader
• Have been trading for between 6 - 12 months
• Have an imperfect credit history
• Do not own property

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 borrowing less than $100,000:

• Proof of identity
• An ABN and GST registration
• An acceptable credit rating — the lender will ask to conduct a credit check
• Business bank statements
• Trust Deed if the business is held in a trust
• Australian Tax Office (ATO) Portal access.

If you are borrowing more than $100,000:

• All the documentation provided if borrowing less than $100,000; and
• Financial records (provided by your accountant)
• Profit and Loss Statements
• Balance Sheet

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.

Each lender will have different approval criteria, but here are some tips to improve your chances of getting approved.

• Demonstrate an ability to service your business loan or lease.
• Meet the lender's criteria for acceptable credit rating
• Meet the lender's criteria for minimum turnover and maximum debt
• Provide profit and loss statements and your business balance sheet
• Provide details of the asset you wish to purchase
• Provide read-only access to your business bank statements
• Provide a personal guarantee by the director of the company

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.