Operating lease

An operating lease is a lease where the lessor retains substantially all the risks and rewards of ownership, including the asset's residual value risk at the end of the term, and the lessee simply pays for the use of the asset over the lease period before returning it, upgrading, or in some cases extending the arrangement. It suits businesses that want predictable, generally lower periodic payments and no direct exposure to what an asset will be worth when the lease ends, particularly for equipment that dates quickly or that a business prefers to refresh regularly rather than own long-term. Because ownership and residual risk stay with the lessor, an operating lease is typically treated differently on the lessee's balance sheet and for tax purposes than a finance lease or chattel mortgage, a distinction worth confirming with an accountant given the accounting standards involved.⚠ Lenders and lessors assess an operating lease around the asset's expected residual value as much as the borrower's serviceability, since the residual is what the lessor is ultimately relying on to recover its position.

Related

Asset & equipment finance · Finance lease · Chattel mortgage