Operating Leases – Is what you see what you get?

With increasing budget pressures, schools and Local Education Authorities (LEAs) are continuing to turn to leasing as a practical way to fund essential equipment and technology. For years, Operating Leases were considered the standard option for schools and were widely promoted as the preferred route.

But with changes to accounting legislation and the introduction of IFRS 16, schools are no longer restricted to Operating Leases — and many are now questioning whether they ever provided the clarity and certainty schools actually need.

Because when it comes to Operating Leases, the question many schools are now asking is:

Is what you see really what you get?

How the Operating Lease works:

On the surface, Operating Lease payments can look extremely attractive. In many cases, the payments made during the initial agreement period appear lower than the outright purchase price of the equipment itself.

So far, so good.

But as the saying goes:

“All that glitters isn’t gold”

The reason the payments appear lower is because they are often artificially reduced because a large residual or “balloon” payment is built into the end of the Agreement. The crucial point is that this payment does not appear clearly on the lease documentation — and in many cases is not properly understood at the outset.

The supplier receives full payment for the equipment as soon as it is installed, while the leasing company typically only recovers around 90% of the equipment cost during the initial rental term. This means that when the school reaches the end of the Agreement, the leasing company still needs to recover the remaining balance — and its profit.

The unexpected surprise

At the end of the lease, the leasing company generally recovers its outstanding costs in one of three ways:

• By charging the school a substantial residual or balloon payment

• By continuing to collect rental payments

• By requiring the equipment to be returned which they then sell to realise the profit element of the transaction. The school no longer has a solution in place, and nothing to show for the investment they have made over the last 3 years

This is often the point where schools encounter the unexpected surprise.

Because if the school chooses not to pay the additional amount, the equipment usually has to be returned — often in full working order and within strict return conditions. Any damage or faults can result in further charges.

In reality, this can mean a school spends thousands of pounds over several years and still ends up with:

• No ownership of the equipment 

• No equipment remaining in school 

• Additional unexpected costs at the end of the agreement

And because these outcomes are not always clearly highlighted at the beginning, many schools find themselves facing costs they simply hadn’t budgeted for.

Beware of the “too good to be true” sales pitch

Some salespeople favour Operating Leases because the artificially reduced payments make the Agreement appear highly affordable.

It can sound convincing when presented like this:

“The school will pay less over three years than if it bought the equipment outright.”

But the reality is often very different.

What initially appears cheaper may simply mean:

• More payments later 

• A large residual payment at the end 

• Or the return of the equipment altogether 

In some cases, schools discover that after years of payments, they have nothing to show for their investment unless they commit to further expenditure.

Why more schools are becoming cautious

Historically, Operating Leases were commonly recommended for schools. However, the introduction of IFRS 16 has changed the landscape considerably.

The Department for Education (DfE) now permits Finance Leases, giving schools access to more transparent and flexible alternatives.

As a result, many schools are now questioning whether Operating Leases truly provide:

• Financial certainty 

• Clear budgeting visibility 

• Flexibility for future planning 

• Transparency around total costs 

Because for most School Business Managers, knowing the true overall cost of an agreement matters far more than simply seeing a lower initial payment.

As one group of School Business Managers told us at a recent regional meeting:

“If there’s one thing Business Managers like, it’s financial certainty.”

And they’re absolutely right.

Schools need complete clarity around:

• The total cost of investment 

• What happens at the end of the agreement 

• Whether any additional payments will be required 

• And whether they’ll actually retain the equipment they’ve been paying for 

The clever alternative

The good news is that Operating Leases are no longer the only option available to schools.

Modern leasing solutions can now provide:

• Transparent agreements 

• Fixed and predictable payments 

• Clear end-of-term outcomes 

• Greater flexibility 

• And full visibility of the total investment from day one 

At Funding 4 Education, our bespoke rental plans are specifically designed to remove uncertainty and provide schools with complete financial clarity.

In short:

What you see is what you get

No hidden residuals. No unexpected surprises. No uncertainty at the end of the agreement.

That’s why more than 3,500 schools across the UK have chosen our rental solutions as an alternative to traditional Operating Leases.

Considering Leasing for Your School?

If your school is reviewing leasing options or would like advice on an existing agreement, our team is here to help.

Call our care team today on 01625 415 400 to discuss a transparent leasing solution designed around your school’s needs.