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What is an Operating Lease and who uses them?

Guest post by: Al Shea

Article Overview: There are many specialist finance product on the market for all different types of use. The operating lease is a less common type of lease but equally important, here we look why.

What is an Operating Lease and who uses them?

An operating lease is not something you come across every day. It is a more specialist type of lease that only works well in specific conditions. The most common type of user that will take an operating lease is a government body, such as a local council.

The council never want to own an asset once the finance has finished - they have a budget to spend each year to improve their local borough and as such look for the most cost effective way to acquire as much relevant equipment as possible within their budget. An operating lease fits their requirements perfectly because the funder considers the residual value of the equipment they are leasing and factors this figure in when working outthe cost of the monthly payments they offer to the council. The reason they do this is because at the end of the lease the funder takes the equipment back and sells it on at the second hand market value that they based the residual on at the very start of the lease. As such they make additional revenue from selling it at the end of the lease and can therefore reduce the monthly payments to allow for this additioanl income at the end. Everyone then benefits - the council get cheaper monthly payments, and the funder gets to keep the equipment title so they can sell it on at the end of the lease term and realise additional profit from the deal.

Alternatively, the council can sell the equipment on at the end of the lease and they split the proceeds as set out in their agreement with the funder. This way the funder doesn't have any of the removal costs with picking up the equipment, storing it, marketing it for sale and so on.

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Article Tags: finance product, government leasing, leasing for councils, operating lease, public sector finance



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