Commercial Activities
Mind the gap
Independent schools often need to bridge the gap between the need for the latest equipment to run the school effectively and affordability. Phil Harrison extols the virtues of asset finance and leasing to solve this problem
In the independent schools sector, parents expect the latest technologies, the finest accommodation and the best facilities for the fees they pay. However, the income generated from school fees can be relatively fixed and the income stream does not always match the demands and requirements placed on the school.
Asset finance can be structured so that the rentals match the income stream of the school. This allows the latest technologies and replacement equipment to be purchased paid for over the period the equipment is used, leaving valuable capital available for staff, maintaining the premises and improving facilities.
However, if used badly, the school could be exposed to unknown finance costs, end of lease risks such as expensive extension rentals, unreasonable return condition damage charges and costly purchase options.
Achieving value for money
Purchase the equipment from your chosen supplier, negotiate the best deal and maximum discount available for outright purchase. Then, if the school requires 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. By acquiring the equipment and finance this way, the school will be able to determine clearly 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.
Other benefits?
Firstly, asset finance and leasing removes 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. This creates time for new equipment to be ordered and be in place before the old equipment needs to be removed and returned.
Secondly, by spreading the payments, it avoids peaks of capital expenditure, eases cashflow and leaves valuable capital resource for assets that can’t be leased.
In most organisations, including schools, capital expenditure is often postponed if there is pressure on budgets in that financial year. How many times do you hear “we’ll keep that minibus another year, or that laptop is still working, so why change it?” It is acknowledged that keeping equipment beyond its useful life is a false economy, as additional maintenance and repair costs can soon outweigh any benefit from keeping it.
Thirdly, if you opt for an operating lease, the lessor will take the ownership risks of market value fluctuation and disposal risk, allowing the school to concentrate on its core activity of education and avoid being caught up in equipment disposal.
Lastly, there are some leasing companies that will 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. In addition, the risk and cost of selling/disposing of equipment is passed to the lessor.
This residual value investment by the leasing company can have one of two benefits:
• savings can be made from annual equipment budgets; and/or
• more equipment can be purchased for a given expenditure/budget.
Example:
For £10,000 of ICT equipment...
Indicative annual operating lease rental: £3,200 (three years)
Total cost to the school: £9,600
Other assets
Typical items financed tend to be ICT and minibuses, but can include catering equipment, gym equipment, whiteboards, office furniture and even portable buildings.
Phil Harrison is part of the management team at UniLink Finance. He can be contacted on phil@unilinkfinance.co.uk
Return to Commercial
