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.
Operating Lease Details
|Similar Finance||Rental Agreement|
Why is an operating lease unique?
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.
Operating Lease Overview
|Ownership||Ownership of the property is retained during and after the lease term by the lender.|
|Running costs & administration||The lender is responsible for all associated costs, which are often included in the lease repayments.|
|Accounting and Tax||Only the lease payments are listed as a business expense on profit and loss statements. Payments are generally tax-deductible.|
What is an Operating 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.
How does it work?
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.
Who would use it?
Businesses use an operating lease for assets which may become quickly 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.
Benefits of an Operating Lease
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How to apply
You can apply for an operating lease through the same process as most equipment finance applications. You can apply for an operating lease with:
- Finance brokers
- Non-bank lenders
- Specialist asset finance lenders
The speed of approval for your application will depend on:
- The type of asset or assets you wish to finance
- The value of those assets
- Your time in business
Operating Lease Interest Rates
Operating lease interest rates will vary between lenders, who will assess your individual circumstances and application to determine your level of risk.
The type of asset you wish to finance, and the age of that asset, will also determine how a lender applies an interest rate to an operating lease. As the assets financed with an operating lease are fairly low value, they will generally have higher interest rates than loans or leases for high-value assets which can be used as collateral.
Operating Lease Interest Rates in Australia
|Lowest Average Rate||Average rate for electronics|
|From 5.10%||From 6.50%|
Learn more about current interest rates and how to get the best rates on an operating lease.
Operating Lease Summary
The main benefit of an operating lease 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
Operating Lease FAQ
What is the difference between an operating lease and a finance lease?
Primarily the difference between the two types of lease are what will happen at the end of the lease term. You can read our guide to compare operating lease with finance lease options with other popular types of equipment finance.
What is an example of an operating lease?
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.
What happens at the end of an operating lease?
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.