This option provides several advantages, particularly for public companies, schools and government bodies. An operating lease is a type of lease in which the financier retains ownership of the leased equipment.
Under an operating lease there is no predetermined ‘residual' value to pay, as ownership does not automatically pass to the customer at the end of the term.
Operating leases may not be listed on a company's balance sheet. Being ‘off balance sheet' is considered a major advantage over finance leases, particularly for public companies, which may have borrowing restrictions. By not having to list the operating lease on the balance sheet the company's debt to equity ratios are not adversely affected.
For high technology equipment (which usually becomes obsolete over the term of the lease) the risk of ownership is removed, as the customer can hand back the equipment and upgrade. It is also possible for the client to have the option to upgrade a portion of the equipment during the term of the contract without penalty.
GST is charged to the hirer on each rental payment.
The client may however, with the financier's agreement, continue to rent the equipment or offer to purchase the equipment for an agreed amount.
Basically under the operating lease/rental option the customer has more flexibility at the end of the term as they may:
- Hand back the equipment and upgrade
- Continue to rent equipment
- Offer to purchase the equipment for an ‘agreed' value
- Renter hands goods back at end of term.
- May contain maintenance agreement
- Off balance sheet lending
- Restrictive in regards to ownership – most agreements stipulate that goods are to be handed back
- Expensive – ‘residual' value is usually geared in favour of the lender
- Contingencies in relation to equipment condition may apply.