Operating Lease is an "off balance sheet" financing procedure, which provides all the benefits of ownership without the end risk of a residual value commitment and is always business related.
This method of financing is ideal for business' that enters into a contract to supply goods and services for a predetermined period, say 5 years they require specific equipment for the term of the contract. At the end of the term, say 5 years; there may not be the opportunity to extend goods & services contract further and therefore the equipment that has been financed is no longer required.
Additionally, if the equipment is required on a month-to-month basis a rental arrangement maybe negotiated without entering into a long term agreement.
To maintain taxation guidelines a "residual value position" will be required by the financier, this amount will usually be guaranteed by the supplier, insurance company or a third party; this residual risk position indemnifies the financier that the residual value will be paid at the expiration of the lease term.
The rentals are treated as an expense, and ownership may be negotiated for a fair market value at the expiration of the agreement.
Operating Leases for motor vehicles are more widely accepted as a traditional way to finance business fleets. Motor vehicle manufacturers will need to guarantee the residual value of their product in order to compete in the motor vehicle fleet market. At the expiration of the lease period the lessee returns the vehicle (under the prescribed conditions) and there is no further obligation.
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