Look hard before you lease

1st March 1996 at 00:00
Renting expensive equipment has lots of advantages if you think it through first. Gerald Haigh picks his way through the pros and cons.

If I say to you: "For Pounds 1 you can borrow my bike for a fortnight, " then the arrangement is surely very clear. You know perfectly well that you have not bought my bike.

What you have bought is the right to use it. The bike is still mine, as you would rapidly discover were you to lose it, give it away or bend the front wheel in the tramlines. At the end of the fortnight, the bike must come back to me in good nick, and if all has gone well we might extend the arrangement, although we would probably re-negotiate the fee.

This, effectively, is what leasing is: paying for the use of expensive equipment that either you cannot afford or that you simply do not want to spend good money on at the moment.

In the business world, leasing is an old and familiar friend. Firms lease just about anything from hot-air hand-dryers to whole fleets of vehicles. Eighty-five of The Times Top 100 companies lease equipment, and the market is currently worth about Pounds 13.5 billion.

Schools, though, have up to now been slow to get into leasing. Governors are notoriously careful with their budgets, as large unspent end-of-year surpluses attest. And in addition it needs to be said that schools, unlike individuals, are not free to run up unmanageable debts. Most of them are publicly accountable institutions, subject to both national and local regulations about the way they handle their money. Grant-maintained schools, particularly, are subject to careful regulation when it comes to raising credit, and local authority schools are bound by local government finance rules.

Nevertheless, more and more schools are beginning to wonder whether they really do need to wait for that new computer system, trying to build up a fund only to see it raided when some emergency comes along.

At William Parker School in Hastings, for example, leasing has allowed the school to have its office computer system, a booklet maker, Archimedes computers for classroom use, bending machines and a vacuum former for the technology department - equipment the school could not possibly have afforded to buy outright.

Similarly, Cranleigh, an independent Headmasters' Conference school, has on lease two sophisticated photocopiers, a postage franking machine and the school telephone system. The photocopiers alone would have cost more than Pounds 80,000 to buy and the obvious point, as Nicholas North, Cranleigh's deputy bursar, points out, is "that it eases the cash flow problems".

Another advantage, Mr North says, is that because you do not own the equipment, you are not left with it when it becomes obsolete. This is why the school is leasing its phone system - "technology is moving forward all the time".

At William Parker, Dr Bob Megit, the head of resources, says: "It does solve the short-term problem. Computers, for example, are going to be obsolete anyway in five years, so you can write them off and start again."

Both Mr North and Dr Megit, however, are clear that a school thinking of leasing has to know what questions to ask. Mr North, for example, suggests looking carefully at the length of time you are signing up for. "I'd definitely be wary about going too far into the future."

Mr North also warns against automatically renewing a lease. "The other day the person dealing with my franking machine came in and asked me to sign up for another five years, but I said I had decided to step back and see what else is on the market."

He has found that one benefit of this is that the firms you approach then compete with each other. "I've saved quite a lot of money pitching one against the other."

Your leased equipment usually belongs not to the firm who delivered it but to the leasing company, which has bought the machine from the manufacturer and is leasing it to you. This means that you do not necessarily have to deal with the leasing firm that comes as part of the rep's package. You can very easily go to an independent leasing company who will buy the equipment you need and then lease it to you.

Rebecca Hunt, of Biddenham Asset Finance, says: "Using leasing companies which work independently from equipment suppliers allows lessees to choose the equipment which best suits their requirements."

A school looking at buying a piece of equipment can, she explains, "either come to us first and then go shopping with the finance, or they can look at the equipment first and then see if we are happy to finance it".

What, I wondered, were the questions that schools ought to ask. Cost, presumably, was one issue? "Percentages - flat rates and annual percentage rates (APRs) - aren't easy to compare. They are very much affected by up-front payments such as deposit; whether payments are made quarterly, annually, in advance or in arrears. The best way is to compare the cost per thousand pounds borrowed."

Cost per thousand means that, for example, a firm quoting Pounds 23.27 per thousand (a typical figure mentioned by Rebecca Hunt) on a Pounds 5,000 information technology system would want Pounds 116.35 a month for five years, a total of Pounds 6,981.

"Some firms have standardised rates," says Rebecca Hunt, "but we try to look at the strength of each proposal and tailor the rate to it."

Schools should watch out for documentation charges, and also ask what would happen if interest rates were to change. "You need to know also whether you are dealing with a principal or a broker. A broker may add on their own commission charges."

Her most important recommendation is to seek independent advice. "Local authority schools should go to their authority and others should go to their financial advisers - and there is the Consumer Credit Trade Association. "

And last but not least, schools should not get carried away to the point where their leasing bill is a worrying burden. School budgets are determined by pupil numbers. These can sometimes change unexpectedly, leaving a school with a five-year commitment to the monthly leasing payment from a shrinking balance.

* Biddenham Asset Finance, Seckloe House,101 North Thirteenth Street,Central Milton Keynes, Buckinghamshire MK9 3NU.Tel: 01908 691220 Stand C41 * Consumer Credit Trade Association, Tennyson House, 159-163 Great Portland Street, London W1M 5FD. Tel: 0171 636 7564

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