|
Lease or Buy?
Contact your financial adviser to discuss how best to acquire equipment.
Leasing is considered as one option under the University's overall
treasury management procedures and direct purchase, if necessary
by funding from an agreed budget deficit against under spending
in future years, may provide the best overall value for money.
Purchasing an asset is nearly always the most convenient method
of acquisition. In some cases purchasing may be seen as impossible
because of lack of funds in the budget. Financial Leases (described
below) are rarely better value than self financing because the University
can obtain funds at highly competitive rates. Operational Leases
may provide the best value when risks associated with technological
change and servicing costs are taken into account.
Some different ways of obtaining assets are outlined below. This
is a brief overview only, but more detailed information can be provided
for specific cases, when required.
Leasing
A lease has been defined as "A contract between lessor and
lessee for hire of a specific asset selected from a manufacturer
or vendor of such assets by lessee" (Equipment Leasing Association).
Ownership stays with the lessor. The lessee has possession and use
of the asset over a period on payment of the specified rentals.
Leasing should be distinguished from hiring (including rental and
contract hire). Hiring requires the user to select from specialised
stock already held by the hiring organisation which usually charges
a fixed tariff. Leasing enables the user to select from a maker
or other supplier of the required asset.
A lease is negotiated, often on tailor-made terms, with the lessor
who acquires the asset which has been chosen by the lessee. The
unique feature of leasing is that it enables the lessee to use assets
by making payments out of revenue. Office equipment (including photocopiers
and fax machines) and furniture, cars and commercial vehicles, computers,
machine tools, laboratory equipment and contractors' plant are likely
candidates for leasing.
Some Advantages of Leasing:
(a) Costs are certain and are known in advance;
(b) The asset cannot be withdrawn once the contract is signed and
its conditions complied with;
(c) No need to tie up capital in fixed assets;
(d) Allowances, depreciation and other calculations are not needed,
since leasing is concerned only with rentals;
(e) Leasing provides a medium-term source of capital which may not
be available elsewhere;
(f) Leasing provides a hedge against inflation as the use of the
asset is obtained immediately - payments are made out of future
funds and are made in fixed money terms, with real costs falling
as inflation increases (this is of less benefit at times of low
inflation);
(g) possibility of immediate acquisition of cost -saving equipment.
Some Disadvantages of Leasing:
1. It is generally not possible to dispose of the asset before
the end of the lease.
2. The asset is not owned.
3. Funds must be found to pay the lease throughout its duration.
FINANCE and OPERATING LEASES
There are two broad categories of leasing situations:
(i) Finance Leases
Here the lessor has no interest in the transaction beyond the supplying
of finance. The lessor pays for the asset and becomes its owner.
The rental paid by the lessee will cover the capital cost of the
asset, a service charge to cover lessor's overheads in raising the
lease, interest charges and some profit for the lessor.
The purpose of this type of lease is solely to provide finance to
the lessee on the security of the asset. The lessee is responsible
for maintenance and insurance.
(ii) Operating Leases
These are mainly undertaken by manufacturers or suppliers as an
aid to selling their products which tend to be highly specialised
or technical. Here the asset is now always wholly amortised during
the period of the lease and the lessor is responsible for servicing,
maintenance and the updating of equipment. This type of lease enables
the lessee to avoid some of the risk of ownership such as obsolescence.
The University's policy in relation to Photocopiers is that
equipment should be obtained on an operational lease under the terms
of an official contract which calculates payments in terms of a
price per copy.
COSTS
Once rentals are agreed and a contract signed they are fixed. However,
the cost of rentals offered by a lessor will vary with interest
rates prevailing at the time. The convention is to offer rentals
at a rate per £1,000 of the purchase price of the asset per
quarter (13 weeks).
At the completion of the lease period rentals reduce to a nominal
annual sum, typically 5% of quarterly rental, until the asset ceases
to be useful.
Hire Purchase (HP)
Also sometimes called Lease Purchase, the operation of such a contract
is very similar to a lease. Payments are made at an agreed rate
and for an agreed duration, but the important difference is that
ownership of the asset does pass to the customer. For the slightly
higher risk to the hirer, the costs are somewhat higher.
The University has the highest credit rating. By exploiting this,
and its record of prompt payments, it has been possible to agree
very attractive rates with major, international providers of finance.
Should a School or Department be considering acquiring an asset,
the advantages of leasing should be considered and the Procurement
department's advice sought as soon as possible.
Firm quotations for leasing and HP costs can be provided quickly
and the contractual aspects vis a vis the finance house can be dealt
with on behalf of the School/Department.
AUTHORITY
Finally, please be reminded that only certain Officers of the University
have the authority to sign Leases or Hire Purchase Agreements under
the University's Financial Regulations. In general the Chief Financial
Officer should sign leases.
|
