Operating Leases – no longer the favoured option for schools!

With increasing budget cuts, more and more Local Education Authorities (LEA’s) and schools are turning to leasing to solve their equipment needs. Whilst Operating Leases used to be the favourite approach, new leasing legislation is now making them a thing of the past.

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What is an Operating Lease?

Previously, Operating Leases were the preferred solution recommended by the Department for Education (DfE) for schools. However, with the introduction of IFRS 16 (a new accounting standard), the rules have changed. The DfE now authorises Finance Leases, as they offer greater flexibility and transparency compared to Operating Leases. If your school is considering leasing equipment, it’s important to understand the key differences before making a decision. You can read more about the DfE’s guidelines here

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The features of an Operating Lease

Artificially Lower Rentals

With an Operating Lease, effectively the payments over the initial period of the agreement will appear to be less than the outright purchase of the equipment.

Regular Equipment Renewals

If you’re planning on upgrading your equipment every few years, Operating Leases could be suitable for you. However, bear in mind you’ll need to make sure your equipment is returned in tip-top working condition, or you’ll face large additional charges at the end of your Agreement.

Why Schools should be Cautious about Operating Leases

While Operating Leases were once seen as a safe option, there could be considerable downsides which schools need to be aware of. These include…

Hidden Costs

Operating leases often include additional charges that may not be clearly stated in the agreement. Schools need to be aware of all the long-term costs before committing.

Restrictive and Inflexible

Operating leases have strict guidelines in order to be compliant with the DfE’s requirements. This means they’re can be restrictive from a budget point of view and don’t provide the flexibility most schools require.

Large Balloon Payment

If you calculate the total amount payable over the initial term of the agreement, you may find you’ll be paying less than the outright purchase price of the goods. That’s because the rental payments are artificially subsidised as there is a large “residual” or “balloon” payment at the end of the Agreement, which the leasing companies have to charge in order to realise a profit - something many schools don’t anticipate.

Left With Nothing but a Bill

At the end of the Operating Lease, you may be required to return the equipment in full working order, and if it isn’t you’ll be expected to pay large additional charges. Either way, you’ll either have no equipment in your school or be faced with an unexpected bill for returning goods. This means schools could spend thousands of pounds on leased equipment and still have nothing to show for it when the lease ends.

Is Your School Considering a Leasing Option?

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