Operating Lease

Running business vehicles doesn't have to hit your cash flow – you can pay as you go with an operating lease.
No obligation. It won't affect your credit score.
Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
Our authors
, updated on July 24th, 2024       

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Operating lease

Operating Lease for Business

An operating lease is a great option for businesses that don't want to invest huge amounts of capital in vehicles. All maintenance and running costs are included – which removes the need for fleet admin. With an operating lease, you basically pay to ‘rent' an asset for an agreed period and then return it to the lessor (finance provider), so you hold none of the risks of ownership or eventual disposal. You get exclusive use of the car, but your business doesn't own the vehicle.

Flexible Commercial Car Finance

Savvy has access to a range of specialist operating lease providers – and the advantages of this type of agreement are many. The fixed-cost payments are tax-deductible for the entire term. Operating leases are shorter-term business car finance solutions – also used for other assets and equipment – and don't run for the whole service life, unlike with a finance lease. There's no residual risk, and when the term is finished, you just hand the vehicle back and upgrade to a new car.

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How to qualify for an operating lease, and how to apply

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The pros and cons of using an operating lease

PROS

No administration

If you're running several vehicles, an operating lease is like outsourcing fleet admin. Maintenance and registration, and all the scheduling, are included in the cost of the lease.

Upgrade frequently

Leasing a car with a shorter-term operating lease means you can upgrade more often than with a finance lease – without the capital outlay required to buy vehicles outright.

No risk of ownership

There's no time and cost-consuming buying and selling for businesses that need to change vehicles regularly. You can run presentable and reliable cars without any ownership or disposal risks. Disposal and residual risks basically amount to the car not being worth the value of any remaining finance at the end of a lease term – which can happen with a finance lease.

Tax benefits

The regular payments made on an operating lease are tax-deductible. It's pretty much like renting a vehicle over a reasonably long period, so you can claim it as a cost of doing business. Also, because the lessor claims back any GST in the purchase price, your payments get based on the GST-free value of the car.

CONS

Kilometre limits

Because you're not leasing a vehicle or machine for the whole of its serviceable life, lessors specify usage limits.

Signwriting, saleable condition

Operating leases allow for expected wear and tear, but you'll need to return a vehicle in good condition. That means removing signwriting, for instance.

No purchase option

Unlike with finance leases, there is no option to buy built into an operating lease. Cars typically get sold at public auction once a rental term ends.

Not suitable for long-term use

If you don't need or want to upgrade vehicles often, a finance lease may work out better than an operating lease. You get the option to own cars at the end of the term, and that works well when you want to use vehicles for several years.

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Everything you need to know about operating leases

What's the difference between a fully-maintained and non-maintained operating lease?

A fully-maintained operating lease is when you let the lessor handle all the associated requirements of running a vehicle. A non-maintained lease is when you take care of admin and servicing yourself. Because the asset doesn't belong to your business, if you choose a non-maintained car lease, you'll be required to have a minimum level of insurance. You'll also need to adhere to the correct maintenance schedule to ensure the warranty and expected resale value remain intact at the end of the agreement. That's why so many Australian businesses opt for a fully-maintained operating lease.

What gets included in a fully-maintained operating lease?

Fully-maintained operating leases come with a range of services built-in. Accident-management, breakdown cover, tyres, servicing, and other maintenance are all included within monthly payments. Your business is also free from administration connected with registration and insurance.

What are the main differences between a finance lease and an operating lease?

With a finance lease, your monthly payments cover most of the full value of a car or other asset – then the residual amount at the end of the term covers the rest, so you have an option to take full ownership. An operating lease gets based on less than the service life of a vehicle or equipment. You sign up for a shorter period and have no obligation to buy the asset. The lessor is responsible for disposing of the car or machinery, so you have no residual value risk. Operating lease payments are tax-deductible, but with a finance lease, you can usually only claim the interest portion of payments.

What's the initial cost of an operating lease?

Operating leases don't require any up-front payments. The lease's full cost gets divided across the regular fixed payments for the term of the lease. There's also no residual amount when the lease term ends.

How long does an operating lease last?

Operating lease terms usually run between one and five years. Different lenders have varying policies, so it's best to let a Savvy consultant know your aims, and we can look at operating lease providers that suit.

Can I buy more than one vehicle with an operating lease?

You can. One of the strengths of an operating lease is it lends well to fleet management. Many medium and larger sized businesses find that they can make huge savings on the cost of administration by outsourcing via an operating lease – and the only limit on the number of vehicles or assets relates to your needs and financial situation. Even for smaller businesses and owner-drivers, an operating lease works well because it removes the risks of ownership, registration, insurance, and maintenance.