Commercial Activities

A lease of life?

Independent schools often need to use alternative sources of finance to fund the latest or upgraded equipment. Where should you turn? Phil Harrison extols the virtues of asset finance and leasing to plug this funding gap

The payment of school fees often creates a parental expectation that a school will have the latest technologies, the finest accommodation and the best facilities. However, the income stream does not always match the demands and requirements of equipment replacements and refresh.

Asset finance can be structured so that the rentals match the income stream of the school and spread the costs of acquiring new equipment. This allows the purchase of the latest technologies and replacement equipment which are paid for over the term of the lease, leaving valuable resources available for other purposes.

However, if leasing is undertaken without understanding the risks, schools could be exposed to unknown finance costs, end of lease risks such as expensive extension rentals, unreasonable return condition damage charges, disposal costs and expensive purchase options.

Achieving value for money
Many suppliers offer finance as part of the supply. Often this will be offered as a monthly or quarterly rental without disclosure of the cost of the equipment. How do you determine value for money without knowing its cost? Buy the equipment you need from your chosen supplier, negotiate the best deal and get the maximum discount available for outright purchase. Then, if you require finance to cover the cost of that purchase, seek an independent lessor that specialises in that equipment and arrange the finance on the equipment separately.

The suppliers, in most cases, will invoice your chosen lessor, negating the need for the school to buy the equipment first. By acquiring the equipment and finance this way, you will be able to determine the true cost of finance, and therefore the total cost of ownership of that asset. Avoid offers that roll up previous agreements into a new agreement. You will be funding interest on interest.

Other benefits
Firstly, asset finance and leasing facilities remove the risk of technical obsolescence. There is a danger if equipment is purchased outright that a school will still be using that equipment beyond its useful life. Often, leasing brings a sense of discipline to asset management because it forces a decision about new equipment purchases to be made in advance of the lease end.

Secondly, by spreading the payments, schools avoid peaks of capital expenditure, ease cashflow and leave valuable capital resource for assets that can’t be leased. Capital expenditure is often postponed if there is pressure on budgets in a particular financial year. Keeping equipment beyond its useful life is a false economy, as maintenance and repair costs can outweigh benefits.

Thirdly, if you opt for an operating lease, the lessor will take the ownership risks of market value fluctuations and disposal risk, allowing the school to concentrate on its core activity of education and avoid being caught up in timely and expensive equipment disposal.

Lastly, there are some companies that lease equipment but assume that if you return the equipment to them that they will achieve sale proceeds in the open market;
therefore, the school only finances a percentage of the cost of the equipment. This is commonly known as “residual value”. This residual value investment by the leasing company can have one of two benefits:
• savings can be made from budgets but you still get the required equipment; and/or
• additional equipment can be purchased for the same expenditure/budget.

For example: for £10,000 of ICT equipment...
Indicative annual operating lease rental: £3,200 (three years)
Total cost to the school: £9,600

Typical items financed by schools tend to be ICT and minibuses, but can include catering equipment, gym equipment, whiteboards, office furniture and modular buildings. Different lessors will fund different assets, some will fund a wide range of assets. Knowing where to source good finance is time-consuming. However, there are specialist advisors that can help schools find value for money.

Phil Harrison is part of the management team at UniLink Finance. He can be contacted on phil@unilinkfinance.co.uk

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