To many business owners accounting terms, like operating leases, mean nothing. Running a business is hard and your head will be swamped with keeping clients and employees happy, not to mention trying to stay afloat in a hard economic environment. However, you might be missing out on tools and tricks that can help your business succeed and run far more smoothly.
Here we’ll talk about the operating lease and how your business could benefit from exploring it. We’ll also look into alternatives to operating leases too. But first, what is an operating lease?
Operating Leases Defined
Operating leases are essentially the easiest form of leasing equipment. You don’t own the asset, whatever it may be. You just lease it on an ongoing basis. Essentially, operating leases are defined as a contract where the owner of the asset (machinery, computing equipment, etc.), the lessor, gives the lessee (being you) use or access to that asset. The time you have access to it will of course vary, but is usually less than the economic use of the asset.
This definition is in line with ASC 842, the newer accounting standard for lease accounting. If you’re going to consider operating leases, ACS 842 is the accounting standard to follow when you’re drawing up your accounts.
Now you know what an operating lease is, how can it benefit you?
Cash To Debt Ratio: What Works For You
It all depends what your overheads are and what your cash flow is like. Some businesses will prefer to keep the monthly bill down and buy the assets outright. Of course, for newer or growing businesses this isn’t always feasible because certain assets, like heavy machinery for example, can be incredibly expensive.
However, if you already have high monthly outgoings on rent, wages, materials etc. buying outright might be the only option. Remember, you might be better off by entering into a lease agreement with a company, than by getting a loan from the bank and paying it off monthly.
You also have to look at the contract. A contract with a company leasing you equipment is likely to be more beneficial than a loan with a financial institution like a bank.
Remember, each business is different. One might need to spend a fortune on machinery and equipment, while another might not need to. It’s just about working out whether you can afford the extra monthly spend or not. If you can, leasing the asset might be better for you over time.
Why Can Operating Leases Benefit You?
If you work with machinery or systems that are fast being upgraded then entering into an operating lease might be worthwhile. Some contracts allow you to quickly upgrade when new equipment becomes available. This allows you to stay on the cutting edge nad be competitive while offering the latest and greatest to your clients and customers.
If you bought something outright, it won’t be as easy. You’d sell the now obsolete equipment for a fair loss and have to buy new again. It can be a bit of a headache and is a clear cut reason why, in some cases, entering into an operating lease is far more beneficial.
An Example: 3D Printing
3D printing is a great example of how operating leases can be useful to a business. 3D printing machinery and machine shop equipment can be extremely expensive. You can get end user 3D printers, but industrial ones are way more expensive which is why so many businesses will use a 3D printing service. If you lease a 3D printing machine you won’t be burdened with the huge outlay. Also, after the term is completed you can enter into another lease for a more modern printer. 3D printing is a brilliant example of how quickly technology moves, proving that buying outright might not always be the best option. When you’re wondering whether to lease vs buy for business, consider what you’re actually leasing and for what term, because tech can quickly become outdated.
Always Check The Lease Contract
The usage terms, amortization schedule, and cost can be defined and dictated by the contract terms. Make sure you pay attention to it. If the contract is a bit confusing to you, you’d be better off asking an accountant to check it. Adherence to ASC 842 lease accounting is important, and they can check that for you too. You might find accounting for leases fairly simple and have the time to do it for yourself. Just make sure you’ve gor your head around the concepts of the new lease accounting standards first.