There are several ways of paying for purchases, especially those of a higher value. These should be considered when determining how to fund a major procurement. They are more likely to relate to equipment or major building projects. The main methods are:
Outright purchase
The equipment is paid for at the time of its purchase using available funds. If the funds are to be borrowed under a bank loan, then the cost of repayment interest needs to be taken into consideration when calculating the total cost of the payment.
Hire purchase
With hire purchase (HP), a finance company purchases the requirement. It then belongs to the finance company which allows the ‘hirer’ (your institution) to use it in return for regular payments. The payments consist of a proportion of the initial capital cost and interest due over the period of the HP contract. When all the payments have been made the hirer becomes the owner either automatically or on payment of an agreed option-to-purchase fee.
The main benefits of financing equipment under a HP scheme are that the full purchase price is not needed at the beginning and subsequent payments are spread out over a period. This can be useful where funding is tight or there is an anticipated income stream from which the payments can be made. It is important to ensure that there will be funds available to make the regular and final payments.
The downside of a HP scheme is that the overall cost of the purchase will be higher than if the equipment was paid for outright at the start. Also, should the need for the supplies cease during the period because they belong to the financing company, payments will have to continue even if the equipment is not being used.
Operating lease
An operating lease commits the lessee (you) to a short-term contract or one that may be terminated at short notice. The finance company expects the arrangement to end before the end of the life of the equipment and will expect to plan to dispose of it on the second-hand market. Operating leases are useful where there is a short-term requirement, for example, in a research project rather than buying equipment that will not be needed later.
Finance lease (also called a capital or full payout lease)
Here the finance provider expects to recover the full cost of the equipment, plus interest, over the period of the lease. The lessee usually has no right of cancellation or termination and bears the ‘risk and rewards’ of ownership and is responsible for insurance, repairs, etc.
Your finance department should be involved in any financial costings of options for major projects.
School / MAT members - the information on this page aligns with the following ISBL Professional Standards: 3.3, 3.4, 3.11, 3.12, 3.27, 3.28, 3.31, 3.32