For almost every school, leasing is an essential part of their budget management and can be a very effective way of equipping their teaching environment. In most cases, schools choose to use operating leases as they believe this is the only option available.
But do operating leases provide sufficient clarity for schools?
How the Operating Lease works:
On the surface, Operating Lease payments look attractive as typically the payments made over the period of the Agreement will be slightly less than the outright purchase price of the equipment. So far so good, but as my grandma used to say…
“All that glitters isn’t gold”
The lease payments are artificially reduced because a large balloon/ residual payment is built in at the end of the Agreement and under the rules of the Operating Lease, this large residual payment does not appear on the Agreement nor in most cases, is it disclosed.
The equipment supplier is happy, as they’re paid their full invoice price for the equipment once it has been installed. The leasing company then recovers approximately 90% of the value of the equipment over the period of the Agreement so after the school has made all the payments, the leasing company still hasn’t recovered the initial outlay to the supplier.
“The Unexpected Surprise”
At this point the leasing company is still out of pocket so it has to make its profit and it does this in one of three ways:
· by charging the school the large (and unexpected) residual or balloon payment
· by continuing to collect rentals from the school
· by requesting the school to return the equipment which they then sell to realise the profit element of the transaction. The school no longer has a solution in place, nothing to show for the investment they have made over the last 3 years.
As none of these options appear on the initial Agreement, the school is often left with an unexpected surprise and expense that hasn’t budgeted for.
Beware of Sales “Ploys”
Less scrupulous salespeople tend to like the operating lease as the “artificially” reduced rental payments allow it to be promoted on the basis that the school will pay less out over the 3 years than they would if they bought it outright. Whilst that sounds plausible on the surface, in reality, it’s far from the case. The school will either have to make more payments or, worst-case scenario, could be left with no equipment at the end of the 3 years and nothing to show for their money.
In fact, schools that have a full understanding of the “residual value” lease, dislike it as they don’t get true visibility of the actual payments – the residual payment hasn’t been agreed nor under this arrangement are the school allowed to officially take title in the equipment at the end of the Agreement. It lacks clarity and certainty for future financial planning.
We are frequently contacted by schools seeking advice where they have entered into Operating Leases and find that they have not accounted for the ongoing payments. Understandably, it almost inevitably ends in tears as the school have incorrectly believed their liability was the three payments as they appeared on the Agreement, which doesn’t ever cover the leasing company’s initial outlay. We help the schools to mitigate their situation but inevitably and rightly or wrongly, they feel bruised as a result.
Schools like Financial Certainty
A few months ago, we were invited to speak at a Regional Meeting of the Association of School Business Managers on “Leasing within education and maximising the benefits”. When we discussed the operating leases and the “smarter” alternatives, the Business Managers were unanimous in their response.
“If there’s one thing that Business Managers like, it’s financial certainty”.
They were also agreed that it was imperative that they should have visibility of the overall “cost of investment” for the school and not just the immediate payments. That means they want clear and unambiguous clarity regarding what happens at the end of the Agreement – including particularly any additional financial outgoings.
The Clever Alternative
The good news is there is an alternative that not only complies with the Operating Lease guidelines but more importantly provides financial certainty and clarity to the schools. In short – “What they see is what they get!” I’m referring to Funding 4 Educations bespoke rental plans, which not only provide the financial certainty and clarity, but also reduce the overall investment. That’s why over 3,500 schools across the UK choose our rentals over operating leases.
If you would like expert advice on an existing Agreement or would like to discuss a new a Lease Agreement, please get in touch with our care team on 01625 415 400.