OPERATING LEASE

An agreement to use and operate an asset without the transfer of ownership. An operating lease works like a rental agreement in that you only the vehicle pay for use of the vehicle. We take the risk on the purchase and resale of the vehicle.

An operating lease is a contract for a business to use an asset without owning it, where the ownership risk remains with the lessor. The lessee makes regular payments for the use of the asset, returns it at the end of the lease term, and treats the payments as an operating expense. These leases are often used for expensive assets like real estate, vehicles, and IT equipment, providing flexibility without the commitment of ownership

Key characteristics

• No ownership transfer: The asset is returned to the owner (lessor) at the end of the lease period.
• Risk remains with lessor: The lessor retains the risks and rewards of ownership, such as depreciation.
• Expense treatment: Lease payments are recorded as an operating expense on the lessee’s income statement.
• Commonly used for: Assets with long useful lives or those that need to be replaced regularly, like vehicles, office equipment, and real estate.

Advantages for the lessee

• Avoids large upfront costs: Businesses can use assets without a large initial investment.
• Flexibility: Ideal for assets that may need to be updated or replaced frequently.
• Simplifies budgeting: Provides predictable monthly costs, which can make budgeting easier.
• Focus on core business: Allows companies to use assets without the burden of maintenance and management.