What is An Operating Lease

An Operating Lease: How it Works

Defining An Operating Lease

An operating lease allows a business to make use of an asset (in this case a car) but does not burden the company with the associated risks of ownership of the asset.

How an Operating Lease Works

If you want to make use of a vehicle within your business for a period of time but do not wish to outlay the money or have the hassle of acquisition, an operating lease maybe right for your business.

Under an operating lease the risks and rewards of ownership are borne by the lessor (PAR Leasing) and your participation is primarily one of usage of the vehicle. The main features of this type of lease are:

• Your business has no risk on the finance and disposal of the vehicle
• The vehicle is simply returned to the lessor at the lease termination
• Lease rentals are tax-deductible for your business
• The Amount financed is GST exclusive
• Fixed rentals assist with future budgeting for your business
• An operating lease, like any other lease agreement, needs your commitment and has obligations for both your business and the lessor.

Before entering into an operating lease you must evaluate:

• Is this the right type of financing for your business
• Consider the balance sheet consequences
• Understand what tax benefits and implications may occur for your business
• Understand what your responsibilities are under the legal contract

Documenting an Operating Lease

An Operating Lease is a legally binding contract. As such, there are clauses and conditions that are set out within the legal contract that you must consider, and that you will be agreeing to upon entering into the agreement.

A PAR Leasing operating lease contract contains the following information:

1. Lease Dates, Term, Rental Schedule, and End of Term

• It will state the date that the lease agreement takes effect from, and will be the date that you have taken possession of the vehicle/asset.
• The term or length of the agreement will be stated, this will be how long you are to make payments for the vehicle/asset.
• It will include a rental schedule which sets out the amounts due, the dates these are due to be paid and conditions of the payments.
• The lease will also state when you should return the leased vehicle at the end of term and any conditions relating to the return. It will also state any conditions around renewal of the lease.

2. Certification of Acceptance

• An operating lease includes a Certification of Acceptance. It clarifies that you have accepted that the equipment is safe to use and suits your needs. You will also acknowledge maintenance terms.

3. Lease Obligations

• An operating lease should state what your responsibilities are for the leased vehicle. Furthermore, it should explain the limitations of using it.

4. Assignment of Warranties

• You will receive the requirement to insure. PAR Leasing will assign you warranties from the car’s manufacturer. Along with instructions to return the vehicle when the lease is up.

5. No Return of Capital

• With an operating lease you are not providing any capital and as such at the end of the term there is no return of capital.
• This is different from a finance lease or purchase agreements where you will have provided capital and are responsible for the remaining balance on the finance at the end of the term.

Operating Vs. Finance Lease

To help you decide if an operating lease is the best option for your business, you need to know the difference between it and a finance lease.

1. Ownership – The first difference is that of ownership. With a finance lease, the asset, in this case, the vehicle, becomes the lessee’s responsibility and risk at the end of the lease term. With an operating lease, the ownership and risk of the asset at the end of the lease sits with the lessor.

2. Bargain Purchase – A finance lease has a bargain purchase option that enables the lessee to buy the vehicle at less than market value. An operating lease, conversely, does not allow you to do so.

3. Duration/Term – With a finance lease, the lease term equals or exceeds the estimated useful life of the vehicle. The duration of such an agreement is less than 75% of the vehicle’s useful life.

4. Current Value – With a finance lease, the value of the lease payments equals or is higher than 90% of the cost of the equipment. The payments of an operating lease are less than 90% of the value of the vehicle.

5. Risks – With a finance lease, the lessee pays for the maintenance, insurance, and taxes. With operating leases, the lessor (PAR Leasing) pays for these costs if all included in the lease, that minimizes the risks for lessees.

6. Tax – With a finance lease, the lessee is the owner of the equipment. He is responsible for interest and depreciation expenses. With an operating lease, the lessee rents the asset (vehicle) and is not liable for such costs.

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