Quick answer
An operating lease is a rental arrangement where a business uses a vehicle or equipment for a set period and the lessor keeps the ownership and most of the resale risk. At the end, the asset is typically returned, upgraded or extended. Ownright Custom Finance can look at operating lease options Australia-wide.
Key points
- Shorter commitment than most finance leases or loans
- The lessor generally keeps ownership and the resale risk
- Good for equipment that dates quickly or changes with the work
- Maintenance and end-of-term conditions vary by contract
- Suits
- Businesses wanting flexibility and regular equipment upgrades
- Security
- The leased asset, owned by the lessor
- Ownership
- Stays with the lessor; no obligation to buy
- Australia-wide
- Yes
What is an operating lease?
An operating lease is a way of using a vehicle or piece of equipment without taking on the long-term ownership burden. The lessor buys the asset and rents it to you for an agreed term, usually shorter than the asset’s full working life. When the term ends, you return it, move to a newer model or extend the arrangement. The lessor keeps the title throughout and carries most of the risk that the asset is worth less than expected.
That makes it quite different from a loan. You are paying for the use of the asset, not working towards owning it.
Who uses operating leases?
- Businesses with technology that dates quickly, such as computers and point-of-sale gear
- Fleets that rotate vehicles on a regular cycle
- Project-based firms needing equipment for a defined period
- Medical, dental and office practices that like to keep equipment current
- Start-ups that prefer to keep cash free
If you already know you want to keep the asset for its full life, a finance lease or chattel mortgage may be a better fit.
How does an operating lease work?
- You choose the asset and agree the term with the lessor.
- The lessor assesses your business and the asset.
- The lessor purchases the asset and you take delivery.
- You pay regular rental payments.
- At the end you return, upgrade or extend, following the contract’s conditions.
Lessors expect the asset to come back in fair condition, so the contract spells out wear and tear, servicing and kilometre or usage limits where relevant.
Operating lease or finance lease: which suits?
| Question | Operating lease | Finance lease |
|---|---|---|
| Term compared with asset life | Shorter | Most of it |
| Resale risk | Mostly lessor | Mostly lessee |
| Likely end result | Return or upgrade | Pay residual, extend or return |
| Suits | Fast-changing equipment | Long-life equipment |
What do lessors look at?
Business strength. Trading history, financials and cash flow. The guide on loan serviceability explains the thinking.
The asset’s resale value. Because the lessor takes the resale risk, the equipment’s second-hand market matters a lot. Popular brands and standard models are easier than niche or heavily customised items.
Usage and condition. Expected hours, kilometres and the environment the asset will work in all influence the lease terms.
Credit and guarantees. Credit history and director guarantees may be considered, particularly for younger businesses.
How is it treated for accounting and tax?
Lease accounting in Australia is governed by AASB 16, which generally moves most leases onto the lessee’s balance sheet for entities that prepare general-purpose financial reports. Tax treatment depends on your structure and the terms of the lease. We are not accountants, so your accountant should confirm how an operating lease would look in your accounts and tax return.
Can I lease vehicles this way?
Yes, vehicles are a common use. If the vehicle is for an employee’s package, a novated lease may be relevant. For business fleets, see commercial vehicle and fleet finance. For technology, IT equipment finance and technology and software finance cover the options.
How Ownright approaches operating leases
Trevor Scott’s team has been structuring finance for a long time, and we think in terms of solutions, not just products. We ask how long you really need the asset, whether you value flexibility more than ownership, and what the equipment is likely to be worth later. Then we compare an operating lease with other routes so the structure suits the business, not the other way round.
We help clients Australia-wide and, if the right lessor is not obvious, we look at what is available beyond the usual suspects.
An illustration
Illustrative scenario only. A growing accounting practice wants to refresh its computers and printers every few years. Rather than tying up cash, the owner considers an operating lease with an upgrade option. A broker could compare lessors, check what happens if staff numbers change mid-term, and note the return conditions so there are no surprises.
Mistakes to avoid
- Ignoring return conditions and excess usage charges
- Locking in a term that does not match how long you need the asset
- Assuming early exit is cheap
- Forgetting insurance and maintenance responsibilities
- Comparing monthly payments without comparing end-of-term outcomes
Documents to have ready
- Supplier quote
- Photo ID
- Recent financials, BAS or bank statements
- Details of existing finance
Our loan-ready checklist and the document guide help you prepare. You can also explore the wider asset finance hub.
Which assets are commonly leased this way?
Typical examples include office and technology equipment, light commercial vehicles, medical and diagnostic devices, printing and packaging machines and some construction equipment. Lessors prefer assets with predictable maintenance and an active second-hand market. If your item is more unusual, expect more questions about who can use it after your lease ends and how it will be valued then.
How do maintenance and damage work?
Responsibility varies by contract. Some operating leases include servicing or maintenance, while others leave it to you. Either way, you are normally responsible for insuring the asset and keeping it in reasonable condition. Damage beyond fair wear can mean extra charges at the end. Ask for the return standard in writing and take photos at delivery.
Can credit problems affect an operating lease?
Yes, but lessors differ. Some are conservative, while others look closely at the asset’s resale value and the strength of recent trading. A deposit, guarantee or shorter term can help. If a bank or lessor has already said no, tell us what happened and we can look at what is available instead of repeating the same application.
How do I compare lease offers properly?
Line the offers up on the same basis: term, total payments over the term, what is included, return conditions, excess usage charges and the cost of ending early. A lower monthly figure can hide a stiff return clause or a short term that forces an early renewal. Ask for the full schedule in writing, and have your accountant look at it if the lease is for a significant asset. We are happy to talk through the trade-offs with you before you sign anything.
Thinking about an operating lease?
Sounds like you want to use the right equipment without the weight of owning it. We’re the lending experts in leases and asset finance, so click the button below and see if you qualify.
How it works, step by step
- 1
Step 1
Tell us the equipment, how long you expect to need it and your budget.
- 2
Step 2
We compare operating leases with finance leases and buying.
- 3
Step 3
We approach lessors that handle that asset class and work with your profile.
- 4
Step 4
You sign, the asset is delivered and the lease begins.
Frequently asked questions
How is an operating lease different from a finance lease?
An operating lease is usually shorter than the asset's working life, and the lessor keeps more of the resale risk. A finance lease commonly runs for most of the asset's life and leaves more risk with the lessee. The right one depends on how long you need the asset and how you want it treated in your accounts.
Do I have to buy the equipment at the end of an operating lease?
No. You are generally under no obligation to buy. Common options are returning the asset, upgrading to a newer model or extending the lease. Some contracts allow a purchase at fair value. Check the end-of-term and condition requirements, because excess wear can lead to extra charges.
Is an operating lease suitable for a new business?
It can be, particularly where the business wants to avoid a large upfront outlay. Lessors still assess trading history, credit and cash flow, and a newer business may be asked for a deposit or guarantees. Appetite varies widely, so we look at lessors who work with younger businesses.
What happens if I want to end the lease early?
Early termination can be costly, as the contract usually requires payment of a substantial portion of the remaining payments. If your needs might change, tell us up front. We can look for terms with more flexibility, or consider whether another structure is a better match.
How are operating leases treated for accounting?
Accounting standard AASB 16 changed how many entities show leases, generally bringing most onto the balance sheet. Smaller businesses that do not prepare general-purpose financial reports may be treated differently, and tax is a separate matter. Ask your accountant how an operating lease would be treated for your business.
Can an operating lease include maintenance?
Some operating leases bundle servicing, maintenance or consumables, particularly for vehicles and certain equipment. Others leave maintenance with the lessee. A bundled arrangement may make costs more predictable, but you should compare what is included. We help you read the fine print before you commit.