Operating Lease
This facility is also a RENTAL facility in a similar vein as Finance Lease, however unlike with Finance Lease in which the full cost of the asset is used as the basis of funding, Operating Lease has a “residual value” built in to the facility to reduce the rental.

This residual value is a figure, not normally disclosed, that the finance company set as the expected future value of the asset at the end of the operating lease agreement. It is at this time that the asset is returned to the finance company for disposal. The finance company would intend to set the residual value high enough as to make the facility financially attractive to the customer, but not so high as they intend to dispose of the asset at the end of the finance agreement for a profit.
  • The finance company bears the residual risk on the equipment's value.
  • Rentals can be set according to your cash flow - especially beneficial if your business is seasonal.
  • Rentals can normally be offset against taxable profit.
  • Asset normally treated as 'off-balance sheet' (subject to your auditors' approval).
  • Fixed or variable interest rate - you make your own assessment and choose accordingly
This facility is often used by clients who may need to acquire an asset to satisfy a fixed term contract however would have no use for the asset if the contract was not extended.

For example, Company A win a three year contract to make widgets for Company B. They need a new widget machine to satisfy the contract but at the end of the contract they would have no need for the widget machine. The machine costs £100K. They could finance £100K over 36 months which would mean their profit margin would be squeezed and at the end of the three years they would own a machine for which they had no work.

However they could use an Operating Lease facility over 3 years as the finance company think this asset would be worth £30K in 3 years time. Company A therefore finances only £70K of the £100K purchase price meaning they have better margins in the 3 year contract. At the end of three years when the contract ends Company A hands the machine back to the finance company and has no need to worry about disposal or remarketing of the asset.

If after three years Company A decided that they wanted to keep the widget machine because Company B extended their contract, then the Operating Lease facility can be extended for a further period or Company A could offer to buy the asset from the finance company. In any event this allows a great deal of flexibility in an uncertain environment.

 

MacManus Asset Finance Ltd is a company registered in England. Company registration number 5785432.
Registered Office: 66 Drum Tower View, Castell Maen, Caerphilly, CF83 2XW
Consumer `Credit Licence Number: 591425
MacManus Asset Finance Ltd is a full member of the National Association of Commercial Finance Brokers - www.nacfb.org