Leasing to match the customer’s needs

Amid current financial constraints, the benefits of leasing are shining through. Simon Goldie, head of Asset Finance at the Finance & Leasing Association, provides his advice on finance agreements

‘More with less’ is a common refrain across all government departments, and the problem is particularly acute in health and education, where pressure on finances could have a very real effect on patient care or children’s schooling.

Smart procurement can go a long way to maintaining quality of service, which is why the Finance & Leasing Association (FLA) has been speaking to the government and public sector about the benefits of leasing.

Paying for the use of equipment over an agreed period avoids the need to buy outright, making this type of finance suitable for even the most stringent budgets. In fact, a vast range of items can be leased, including anything from basic office furniture to the most specialised medical equipment.

In addition, finance agreements can often be tailored to the customer’s needs, with flexibility on both the terms and repayment schedule to help with cash flow or other expenditure constraints.

As with any financial undertaking, it’s important to research the options to decide which ones offer the best value. Although there are two types of lease, the current guidance from the Department for Education limits schools to using operating leases only (the kind more tailored to short-term leasing), because it views the other kind - finance leases - as ‘equivalent to committing the school to a loan’ – which would require permission from the Secretary of State. We are speaking to the government about this, because schools need to have the freedom to lease in the most efficient way.

In addition, we are watching closely the development of IFRS 16, the new lease accounting standard published by the International Accounting Standards Board. It has yet to be decided how IFRS will apply to the UK public sector. If it did, it would remove the distinction between operating and finance leases by introducing an accounting model that requires a lessee to recognise assets and liabilities on their balance sheet for all leases with a term of more than 12 months, unless the underlying asset is of low value.

Our concern is that the new standard’s complexities may create undue burdens for those considering leasing as a finance option. The Government is very aware of the benefits of leasing and is currently thinking about the possible impact of IFRS 16, including ways that it could be implemented without affecting the ability of UK public services to continue to use this important funding option.

The UK’s independent Financial Advisory Board will be issuing a consultation document in 2017 to assess whether the UK government should adopt the international standard for public sector accounting. At this stage, it is unclear whether it will, and if so what exemptions may be put in place. In any case, it is unlikely that IFRS16 would come into force before 2020, or perhaps even later.

In the meantime, the FLA’s basic checklist for Successful Leasing in Schools provides good tips that can be applied across other public services.

Starting to think about leasing
You should always go through your normal commissioning process for the equipment. This might involve a pre-purchasing review to confirm what equipment is needed, and the preparation of specification and evaluation criteria. It is good practice to obtain a range of quotes from various suppliers to understand what is available and compare prices.

You may also want to review the government’s advice to schools on how to plan and run an efficient procurement process to buy goods, works or services and ensure your existing commissioning process is sufficiently robust.

At this stage it is always a good idea to compare the cost of leasing against the cost of purchasing. You should also shop around, as the most competitive quotes for purchasing the equipment might come from a supplier that doesn’t offer leasing - or vice versa.

It is also important to make sure you are comparing like with like. This can include whether different equipment models have a similar level of functionality and whether some options include extras like maintenance and supplies.

What type of lease is right for me?
If you do choose to use leasing, it is important to choose the right type of lease. Operating lease agreements typically have a shorter duration than the full working life of the equipment. The leasing company (‘lessor’) retains the risks and rewards of ownership, and an investment in the equipment being leased.

Finance lease agreements usually run for all, or a substantial proportion, of the equipment’s estimated working life. The leasing company (‘lessor’) transfers all of the risks and rewards of ownership of the equipment to the customer (‘lessee’).

If you are unsure about the type of lease on offer, consult your school’s finance manual or seek appropriate advice.

Things to consider when taking out a lease
Know the finance company. Although some equipment manufacturers may supply both equipment and finance, many businesses offering leasing arrangements to schools are equipment suppliers who offer finance via third party finance companies.

When you are dealing with an equipment supplier you should always check who the finance company will be. Most finance companies are members of the FLA. FLA members follow the FLA’s Business Finance Code which sets out standards for providing information, customer service and complaints procedures.

Minimum lease period. This is the shortest period for which the school will have to make rental payments for equipment. The period is fixed regardless of other factors such as changes in technology or changes in the school’s needs.

When taking out a lease you should consider how long the school has tended to keep similar equipment in the past, or speak to other schools leasing similar equipment to ensure that the minimum lease period is appropriate.

At the end of a lease you will generally be offered the opportunity to continue leasing the equipment at fair market rentals or to return the equipment to the leasing company. Either option might be appropriate for your school but you should ensure you understand each alternative and what you might need to do in each instance (e.g. give notice that you will be returning the equipment).

Maintenance and supplies
It should always be clear when maintenance or supply services are included or excluded in the lease. The simple checks below can help you understand the obligations of each party, and who will provide any services under the lease agreement.

For maintenance, firstly check whether the maintenance contract is separate from the lease agreement. If it is, check whether the length of the two agreements is the same, and how much notice might be required to terminate each. Check what level of service you will get – for example, will there be regular maintenance visits or will you need to alert the maintenance provider in the event that a fault occurs?. You should also check the maintenance charge amounts, and whether a similar level of service could be obtained from a different supplier at lower cost and check what would happen if the company providing the maintenance went out of business, and how this might impact on your use of the equipment and lease payments.

With supplies, check whether the provision of supplies is covered by a separate agreement from the lease. If it is, check whether the length of the two agreements is the same, and how much notice might be required to terminate each. Additionally, check that it is clear what will be provided and by whom and check whether it would be better value to buy supplies separately over time as and when they are required. Lastly, check what would happen if the company providing the supplies went out of business, and how this might impact on your use of the equipment and lease payments.

Always seek specialist advice before upgrading, whether from the local authority, the National Association of School Business Management, or other professional associations.

Last but not least - like any finance product, if it sounds too good to be true, it probably is.