What is an Operating Lease?

The Institute of School Business Leadership (Previously the NASBM) states:

An Operating Lease is the only type of lease agreement that state funded schools (local authority or Academy) can enter into without prior approval.

No other form of finance (such as hire purchase) may be entered into by a school as this is a prohibited form of borrowing.

What are the benefits of an Operating Lease?

  • Fixed, known payments
  • Improved cash flow
  • Reduced tax payments and the option to reclaim VAT
  • Rentals are considered an expense item
  • Additional line of finance that may not affect banking arrangements
  • Reduces the risk ownership

What does it mean for you?

  • Typically, rentals work out to be interest free or thereabouts.
  • Contracts are usually for a 24 or 36 month term, We can quote the costs of a 48 or 60 month lease if you contact us directly.
  • You have the right to return or retain the equipment at the end of the contract
  • You pay for usage rather than ownership

How does it work?

Over the agreed period of the operating lease, you will be able to make full use of the asset in question and in return make regular rental instalments to the asset finance company.

An operating lease is typically used where assets have a residual value, such as vehicles and machinery. The residual value of the asset is estimated when the lease is set out. The leasing company runs the risk that this value could increase or decrease over the period of the contract. However, the residual value is still set at the beginning of the contract.

The rental payments do not cover the entire cost of the asset or assets but are calculated based on the original purchase price and the forecast residual value. Other services such as maintenance of the assets, may also be included in the operating lease, depending on the exact terms laid out in the initial agreement.

At the end of the operating lease, the asset will be returned to the leasing company for it to either be re-hired or to sell it on to release the residual value of the asset. Due to the nature of an operating lease, it is currently considered as an off balance sheet arrangement.

We have tried to clarify the administration surrounding the setting up of an Operating Lease and thought the most effective way is to itemise the answers to the questions we are most commonly asked. Please contact us for a copy of our easy to understand guide to Operating Leases.

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