What type of lease is best for your business?Published on 29th March 2017
Sometimes, ensuring that we have all the equipment our business needs can be expensive, exasperating and the cause of many headaches. Yet, no doubt many of us in the business community are familiar with the humble lease. To many, it is simply a way of borrowing a piece of equipment, or even an entire set, for a prescribed period. However, what you may not know is that there are two types: Operating Leases and Finance Leases. What’s even more misunderstood is how these two products differ from each other. So, to clear things up and offer you some clarity, here’s a masterclass into bamboozling the world of equipment leasing.
Operating leases are the more user-friendly version that springs to mind as soon as we even hear the term ‘lease’. With this product, you’re only required to pay a monthly rental charge for access to the asset’s usage. Everything else falls under the owner’s jurisdiction.
To summarise this further, the owner, or lessor, is responsible for all aspects such as maintenance, repairs, registration and so on. Plus, because you aren’t the owner, the equipment shouldn’t appear upon your business’s balance sheet and affect your tax arrangements. Nevertheless, we strongly advised that you double check with your business accountant regarding tax status before entering into an agreement.
Operating lease terms also vary significantly to those offered under the Finance Lease option. To elaborate, operating leases are designed in a manner that allows you to borrow equipment for a portion of the asset’s projected useful life. This could be, for example, a predetermined period equivalent to 75% of the asset’s useful lifespan. As such, operating leases are more commonly offered for soft assets such as laptops, computers, drink dispensers and so on. Also, with this type of finance package, the owner will usually take the asset back or allow for a term extension rather than offer you the option to purchase the asset.
Now, this is where things differ significantly and cause the most confusion. Technically, you are still borrowing equipment for a prescribed period of time. However, with this product, you are taking on much more responsibility for the asset. Unlike operating leases maintenance, repairs, running costs, administration, and registration all enter your domain.
In addition, the terms offered by Finance Leases now covers a more significant portion or even the entire projected lifespan of the asset. The asset is also treated much differently and now appears on your business’s balance sheet but, as a result of this, you could be entitled to reclaim interest. Same as before, just be certain to check this over with your business accountant first. Due to how this product applies to your business, it is usually offered when dealing with larger assets such as plant machinery, land, vehicles, office spaces and so on.
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