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Operate leasing: leasing without being tied to a long-term contract

Operate leasing: leasing without being tied to a long-term contract

Operate leasing makes it possible to lease assets on a short-term basis. Generally with a very short basic term or even none at all. This provides planning certainty as well as additional leeway for companies. See below for an overview of the key aspects of the operate leasing model.

Diggers, cement mixers and other construction machinery which are needed at a building site for just a few months represent the perfect scenario for the use of operate leasing. However, it is not only in the construction industry that this flexible form of financing is highly popular. Operate leasing is suitable for a large number of other time-limited and plannable projects – such as in the fields of IT and agricultural technology – and is one of the most frequently used leasing models. As with the traditional finance leasing model, here too the lessee will pay a fixed leasing instalment to the lessor for its use of the asset. However, there are a few differences between these two financing solutions.

Difference between operate leasing and finance leasing

In principle, there are two different types of leasing models: operate leasing and traditional finance leasing. Unlike finance leasing – which is designed for the medium- or long-term use of the leased assets – operate leasing is intended for a shorter period of use without the possibility of these assets being purchased at the end of the contract. This financing model is thus similar to a rental arrangement, but includes some additional services. For instance, these may include payment of the operating costs in the case of real estate or regular maintenance and servicing for machinery.

Leasing instalments and risk

One particular feature of an operating lease arrangement is that the lessor’s investment costs will only be amortised through leasing of an asset several times over or its subsequent sale. For the lessee, this means low monthly leasing instalments. This is because its relatively short leasing period only needs to refinance a portion of the investment costs – and because the leased machinery, for instance, is financed with an open residual value. In an operate leasing arrangement, it is thus the lessor who bears most of the asset and investment risk.

Leasing terms and balance-sheet reporting

In the operate leasing model, the leasing contract does not have any fixed term or has only a relatively short term. The term of the agreement will be “short-term” by comparison with the ordinary useful life of the asset. For example, the leasing period may be just a few months. Moreover, the lessor will remain the owner of the leasing asset and will recognise it in its balance sheet. Particularly for companies with global operations which are tied to IFRS or US-GAAP-based international financial reporting rules, operate leasing agreements are playing an increasingly important role in their financing mix.

Eligible asset types

The specific characteristics of operate leasing contracts have a major influence on the types of assets financed. These are not specially made for the lessee and are generally standard “one-size-fits-all” solutions, such as construction machinery or cars. This is because they must be leasable to other customers following the expiry of the leasing contract.

Construction machinery
Commercial vehicles
Construction and agricultural machinery
Bildnachweis: iStock

Resale following the end of the contract

The lessor will retain possession of the assets for whose use the lessee pays an agreed leasing instalment. The lessor will thus be able to resell them following the end of the contract – and to offer leased machines, for instance, to other interested companies as second-hand machinery. To safeguard this resale option, many operate leasing contracts include special insurance policies such as machine breakdown insurance and gap cover which will make up for the shortfall between the replacement value and the remaining amount in the event of damage.