Operating Leases Explained: What businesses need to know
An operating lease provides a flexible way to use important equipment without taking on the costs and responsibilities of ownership.
- Operating leases enable businesses to use assets without owning them.
- Payments for operating leases often include maintenance and running costs.
- Payments for leases with terms shorter than 12 months are simply recorded as expenses (off the balance sheet).
- Operating leases offer flexibility but lessees cannot modify the asset without the lessor’s approval.
Whether it’s a printer or a truck, some assets are essential to keeping your operations running. But buying these items outright isn’t always feasible or ideal for your needs, that’s why many businesses turn to operating leases.
What is an operating lease?
An operating lease is a contract between the lessor, who owns the asset, and the lessee, who borrows it under a lease agreement.
The operating lease means:
- The lessee has full use of the asset for the duration of the agreement, but
- The lessor retains ownership
Operating leases allow businesses to use key resources (e.g. vehicles, machinery) without committing to long-term ownership.
For example, if your business needs a delivery van today but expects to shift logistics providers later, an operating lease lets you use the vehicle without ending up stuck with a depreciating asset.
Read also: Leasing vs buying a car for your business
How does an operating lease work?
Once the lease arrangement is approved, the lessee takes possession of the asset and makes regular payments to the lessor throughout the term.
What’s included?
These payments typically include the upkeep costs of the asset. For example, if the operating lease is for a vehicle, the lease payments will likely also cover registration, servicing, and other upkeep costs.
It is the lessee’s responsibility to ensure the asset is not functionally damaged, except for normal wear and tear.
Accounting treatment
Accounting wise, if the lease term is less than 12 months, the payments are simply recorded as expenses (kept off the balance sheet). For longer terms, the lease needs to be recorded both as an asset right of use, and a lease liability.
Savings.com.au’s two cents
An operating lease can be a strategic tool for your business. If you need flexibility and the ability to upgrade without the hassle of offloading outdated gear, this arrangement can be a smart move.
But like most financial decisions, it’s not a one-size-fits-all. Take the time to weigh the long‑term costs, think about how often you actually need to refresh equipment, and consider how it might affect your balance sheet.
Benefits of an operating lease
There are a few reasons operating leases are a popular choice among business owners.
Cost efficiency
Operating leases generally require lower upfront costs and monthly payments compared to financing a purchase. By leasing the equipment your firm needs, you may have more to invest in other areas of the business.
Flexibility
Operating leases give you the option to keep upgrading once the lease term expires, ensuring your businesses can keep using the most up to date equipment. For example, many offices lease the printer/photocopier so it's simple to switch to updated models, rather than spending several thousand dollars buying one outright that becomes archaic a couple of years down the track.
Potential off balance sheet treatment
If the lease qualifies for the short‑term exemption (less than 12 months with no purchase option), the business can treat costs as operating expenses rather than assets and liabilities, potentially improving financial ratios
Drawbacks of an operating lease
Higher long-term cost
Over the duration of the lease term, the cumulative rental payments for an operating lease might surpass the cost of just biting the bullet and purchasing right away.
No ownership rights
Since the lessor retains ownership, the lessee is restricted in what it can do with the asset under lease. For example, if your business was leasing a van, you wouldn’t be able to make structural modifications like installing shelving, racks, or compartments without the lessor’s permission.
Read also: Novated Leases Explained
Finance lease vs operating lease
Under a finance lease, the financier purchases the asset then lends it to the business for the lease term. Like a commercial hire purchase, the lender or finance company is the legal owner of the asset for the duration of the term.
At the end of the term, the lessee can pay a residual amount (sometimes known as a balloon payment) to take full ownership.
Finance leases are always recorded on the balance sheet as both an asset and a liability.
Finance leases are similar to operating leases in that both are a means for a business to use an asset without owning it, but there are several differences that distinguish the two.
Feature | Operating lease | Finance lease |
Ownership | Remains with the lessor | May transfer to the lessee if the contract includes a purchase or transfer option |
Term length | Less than 75% of the expected useful life of the asset | More than 75% of the expected useful life of the asset |
Maintenance cost | Often included in lease payments | Lessee usually pays running costs |
Balance sheet | On balance sheet unless short-term exemption applies | Always on balance sheet |
End of lease | Asset returned to lessor | Lessee may purchase the asset by paying a residual or balloon amount |
Which lease type suits your business?
Whether an operating or finance lease will suit you better depends on the demands of your business.
A finance lease is better suited if you expect to use the asset long‑term and want the option to own it eventually.
In contrast, an operating lease is ideal for businesses that prioritise flexibility, regularly upgrade equipment, or want predictable costs without long-term ownership.
This makes operating leases especially popular for technology equipment, fleets, and assets that quickly become outdated.
Read also: Fleet financing for your business
Who can get an operating lease?
Operating leases could be suitable for a wide range of businesses, from start-ups to established enterprises. This arrangement can be particularly beneficial for organisations that regularly update equipment or assets, like technology companies, transportation firms, or healthcare providers.
Small businesses that want to avoid the high costs associated with purchasing and maintaining assets could also benefit from operating leases. The eligibility criteria for obtaining an operating lease can vary depending on the lessor but are likely to involve creditworthiness and business stability.
If you think owning an asset, like a vehicle, makes more sense for your business, you may consider financing your purchase through a car loan. The table below features car loans with some of the lowest interest rates on the market.
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Vehicle Type | Maximum Vehicle Age | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.94% p.a. | 7.07% p.a. | $579 | Variable | New | $8 | $400 | $34,749 |
| Promoted | Disclosure | |||||||||
5.67% p.a. | 6.10% p.a. | $575 | Fixed | New | $0 | $350 | $34,524 |
| Promoted | Disclosure | |||||||||
5.95% p.a. | 5.95% p.a. | $579 | Fixed | New | $0 | $0 | $34,757 |
| Promoted | Disclosure |
