Operating Leases – no longer a must 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 a requirement, new accounting legislation is now making them a thing of the past.
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
The features of an Operating Lease
Artificially lower rentals
With an Operating Lease, the payments over the initial period of the agreement are artificially reduced and 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 be tied into these timescales and will also need to make sure each time that the original 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 preferred option, there could be considerable downsides which schools need to be aware of. These include…
Hidden costs
Operating leases include additional charges in the form of a residual or balloon payment that are not 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 as the residual payment won’t appear on the paperwork.
Left with nothing but a bill
At the end of the Operating Lease, if you elect not to pay the larger residual payment, you will be required to return the equipment in full working order, and if the equipment is damaged or non-functional, 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?
Let’s get your school the equipment it needs with a transparent leasing arrangement that works for you!
or call us on 01625 415 400