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?

Operating leases used to be the “go -to” solution recommended by the Department for Education (DfE) for use within schools. With the introduction of accounting standard IFRS 16, the DfE redefined all the rules and there is no difference in the treatment of operating leases and finance leases. The DfE has authorised the use of finance leases for schools which is good news as they provide more flexibility and transparency than their counterpart!

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.

Operating Leases – What to watch for!

Despite the fact Operating Leases are recommended by the DfE, there could be considerable downsides which you need to be aware of. These include…

Hidden Costs

Operating leases, by their very nature contain additional payments which don’t appear on the Agreement. So if you’re thinking of going down this route, make sure you’re aware of all the facts and figures.

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.

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 your school may end up spending £000’s on equipment but have nothing to show for it when the agreement ends.

So what are you waiting for?

Let’s get your school the equipment it needs!

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