Definition: An operating lease is one which has a fair market value buyout at the end of the term with the option to pay it or return the asset; an FMV buyout can be 15%-20% of the original cost. Finance wisdom has dictated if something becomes obsolete quickly you should get an operating lease so you can return it at the end of the term and get the newer model. That’s solid advice but there are many other good reasons to get an operating lease even for equipment that remains useful for many years. The necessity for companies to become creative in order to stay competitive is making this type of lease very popular again.
Why an Operating Lease could work for you:
1) One of the best known benefits is this lease is accounted for like a “rental” and can be expensed and doesn’t show up as debt on your balance sheet. This is critical if you’re going to make a major acquisition in the near future and need your financial statements to look healthy and not loaded with debt.
2) If your company is in a rapid growth stage, like many newer technology companies, you want to keep your monthly expenses as low as possible while matching expenses with revenues. Operating leases have the lowest monthly payments of any type due to the fair market value buyout at the end so this can be the perfect finance for companies with growing requirements they need to meet.
3) Some clients don’t like the idea of a Fair Market Value buyout at the end of the term, even when the lender offers a guideline of what it will be; budgeting for a sizeable payoff can be a little scary. Many owners say when they make the last payment, they want to know the machine is 100% theirs. But what many forget or don’t know is that you can refinance that FMV payoff; as long as your company is healthy, you can get a 2-5 year extension term on the buyout so you never have to come up with a lump of cash.
4) Since an Operating Lease is technically a rental, many equipment vendors will include service and maintenance during the finance period. It’s the vendor’s best interest to keep the system in top shape in case you return it back to them. The service and maintenance applies to only certain types of equipment but can be another nice benefit to consider with this type of finance.
Traditionally, operating leases were exclusively for companies buying trucks, computer networks and electronic diagnostic equipment – all these assets lose their value and become obsolete quickly so returning it for the next best model seemed like a good idea. But there are many other strategies that would make an operating lease the perfect fit; mainly companies which are growing quickly, looking to expand and control their costs each step of the way. Numerous high technology companies are in this mode now and would benefit greatly with this type of lease structure.