Recognising the benefits of Leasing

Recognising the benefits of leasing

More with less’ is a common refrain across all government departments, but the problem is particularly acute in health and education, where too much 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 in a budget-constrained environment, 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.

Researching options
There are two main types of lease – operating and finance. An operating lease would generally be used if the customer only wants the equipment for a certain period – so it would be a good choice for leasing items that need to be updated regularly, like IT equipment in schools, or where a hospital needs to ensure it has the latest scanners.

Alternatively, a finance lease might be more appropriate if the asset is to be used for all, or nearly all, of its working life - for example, basic telephony or office equipment.

With any financial undertaking, it’s important to research the options to decide which offers the best value. Unfortunately, current  guidance from the Department for Education limits schools to using operating leases only, because it  views finance leases as the ‘equivalent to committing the school to a loan’, requiring  permission from the Secretary of State. We would like to see the government rethink its current stance, so as to give schools the freedom to lease in the most efficient way.
In 2014, our members provided £26 billion of finance to the business sector and public services, representing almost 28 per cent of UK investment in machinery, equipment and purchased software.
Leasing is becoming much more prominent in the government’s schemes to boost lending for businesses, and we know it can play a greater role in helping public services meet the challenge of greater demand. If you’re considering leasing, the FLA’s basic checklist for Successful Leasing in Schools provides good tips that could even be applied to NHS leasing. Do also get some expert advice from your local authority (LA), the National Association of School Business Management (NASBM) or your NHS adviser.

Starting to think about leasing
Before starting to consider leasing, schools will go through their normal commissioning process for the equipment, involving a pre-purchasing review to identify the need, preparing a specification, preparing evaluation criteria and obtaining quotes. As part of the usual commissioning process for equipment compare the cost of leasing with the cost of buying. Make sure you are comparing like with like e.g. include maintenance if appropriate. The most competitive quotes for buying the equipment might come from a supplier that doesn’t offer leasing.
Knowing the finance company is very important. Many businesses offering leasing arrangements to schools are equipment suppliers rather than finance companies themselves. Some large equipment manufacturers supply both the equipment and the finance.
Check whether the company you are speaking to is only an equipment supplier. If so ask who the finance company would 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 procedure.
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 the equipment becoming less reliable, changes in the school’s needs or changes in technology.
The shorter the minimum lease period, the less likely it is that you could have to continue making rental payments when it is no longer suitable. So consider how long the school has tended to keep similar equipment in the past or speak to other schools with similar equipment.  

Type of lease
A lease is an agreement to rent equipment, not to buy. The school will not own the equipment after the minimum lease period. Instead, there will usually be the choice of returning the equipment after the minimum lease period, extending the rental period, or purchasing the equipment.
Check what options would be available at the end of the minimum lease period. If the rental period is extended would the rental payments change? What would it cost to buy the equipment? Note that the option taken at the end of a lease could have a retrospective effect on the type of lease it is – operating or finance.
For accounting purposes, there are different types of leases, referred to as operating leases and finance leases. Check the school’s finance manual. Detailed policies vary depending on the type of school. The school may need to seek local authority or central government approval if it wishes to enter into a finance lease.
Maintained schools must comply with their local authority’s scheme for financing schools and associated financial procedure rules; many schemes require schools to seek approval from their LA before entering leasing arrangements. The lease agreement will sometimes include a maintenance or service arrangement, so if the equipment needs servicing there wouldn’t be an extra charge.
Make sure it’s clear whether maintenance is included or excluded. If it is included, check who would provide it. If you are leasing direct from an equipment manufacturer the maintenance might well be provided from the same company. Otherwise it is likely to be provided by a separate company to the leasing company.
Check what would happen if the company providing the maintenance went out of business as you could have to continue making rental payments throughout the minimum lease period even if the equipment doesn’t work. Additionally, check what level of service you will get and check the maintenance charges and whether a similar level of service could be obtained from a different supplier at lower cost. Check whether the maintenance is actually a separate agreement to the lease. If it is, check whether the length of the two agreements is the same and whether notice can be given

Supplies and upgrades
The lease agreement will sometimes include the provision of supplies, such as paper, bulbs, etc. It is important to check: what would be provided and who would provide it; what would happen if the company providing the supplies went out of business; check whether it would be better value to buy the supplies separately over time as they are needed.
During the minimum lease period an equipment supplier may approach the school and suggest that you change or ‘upgrade’ your existing equipment. Always consult experts before upgrading, such as the local authority, NASBM or other professional associations.
Keeping the equipment you have and waiting until the end of the minimum lease period will almost always be less expensive than upgrading. Remember the minimum lease period for the existing equipment is fixed, so an upgrade could leave you paying for two pieces of equipment when you are only using one.

Last but not least
Used with care, leasing can be a useful way of paying for equipment over the period it will be used, avoiding a large one-off payment, and potentially saving money. If it sounds too good to be true, it probably is, so get another quote. Incentives to lease, such as ‘cash-backs, ‘subsidised rentals’, offers of the school being used for marketing purposes are all clues that a better deal might be available elsewhere.
Ensure with the supplier that the equipment is new, or if not that you are content that used or refurbished equipment is suitable, and that the minimum period of hire is no longer than your expectation of the working life of the equipment.
Always ensure that the completed contract corresponds with any verbal or written quotation, and that the equipment description accurately reflects what you are agreeing to pay for including any maintenance or services included in the repayments. Ensure that the supplier of any equipment involved is reputable and an accredited supplier of the equipment involved. Make it clear within your own organisation who can sign such agreements.
Read your business finance agreement carefully before signing it and ensure it is correct, particularly in respect of the rental amount and the period of hire. Never sign a business finance agreement which is not fully completed.
Check the name of the leasing company, and its parent company if relevant, on the page of the lease agreement which you sign and see whether this company is a member of the FLA. Make sure you understand and agree with all terms and conditions of the business finance agreement and, if you are unsure, seek advice. Make sure you understand the costs involved and whether the business finance agreement allows for any automatic increases in charges.
Check the period of hire, any notice period required for its termination and the settlement terms to be applied on early termination. Check whether the business finance agreement includes any supply of services and whether this will continue after the minimum or initial period of hire. If you are entering into a separate contract for the provision of service you should check its terms carefully.
If any amendments are made to your contract, or a further contract is required to replace an existing agreement, do not sign it until you have made the same checks as you did for the original agreement. If a new business finance agreement includes an element of refinancing from a previous agreement with a different provider, check that the settlement figure provided by the former provider matches the refinancing figure used by the new provider.

Further Information: 

Finance & Leasing Association