Operating lease
Operating leases are designed for assets the business wants to use rather than own. Because the rental period is shorter than the asset's useful life, the lender expects to remarket the asset at the end of the term and recover residual value from that sale. The business simply hands the asset back and walks away — or, in some cases, signs a new operating lease on a refreshed asset.
From a cash-flow perspective, operating leases usually have the lowest monthly cost of any asset finance route, because the borrower is only paying for the portion of the asset's value consumed during use. They are particularly popular for fleets, where vehicles are returned at the end of the term and replaced rather than owned.
Under modern UK accounting standards (FRS 102 and IFRS 16), most operating leases are now recognised on the balance sheet as right-of-use assets and lease liabilities, so the historic off-balance-sheet advantage of operating leases has largely disappeared. The cash-flow and residual-risk benefits remain.
Worked example
How the numbers play out
A consultancy operating-leases ten company cars for three years at £350 a month each. Total monthly outlay is £3,500 plus VAT. After three years the cars are returned to the lender, no balloon is due, and the consultancy signs a fresh three-year lease on a new fleet.
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