Leasing versus hire purchase, what are the options?

When businesses consider acquiring assets such as equipment or vehicles, typically there are two primary financing options available, these are leasing and hire purchase. Understanding the distinctions between these methods is crucial for making informed financial decisions that align with your company’s goals and cash flow considerations.

Hire purchase

Hire purchase is a financing arrangement where a business agrees to purchase an asset by paying an initial deposit followed by regular instalments. Ownership of the asset is transferred to the business after all payments are completed.

Key features of hire purchase:

• Ownership – the business gains ownership of the asset upon completion of all payments.
• Payments – monthly instalments typically include both principal and interest, they may be higher than lease payments since they cover the asset’s full value.
• Tax – a business can claim capital allowances and interest deductions, spreading tax relief over time.
• Asset management – suitable for assets with a long useful life, as the business retains the asset after the payment term.

So how does a business choose between leasing and hire purchase? The decision between leasing and hire purchase depends on several factors:

• Asset usage – if the asset is subject to rapid technological changes, leasing may be preferable due to the ability to upgrade.
• Cash flow – leasing often requires lower initial outlays, benefiting businesses with limited upfront capital.
• Long-term needs – for assets intended for long-term use, hire purchase can be advantageous as it leads to eventual ownership.
• Tax considerations – there are tax implications for each option, so it is best to evaluate the context regarding an individual business’s financial situation.

The NGI team recently secured a hire purchase agreement to enable the purchase of a £320K Bentley Flying Spur. Finance was secured for £200K and the deal was completed in only 1 week.

Leasing

Leasing involves an agreement where a business rents an asset from a leasing company for a specified period. Ownership of the asset remains with the leasing company throughout the lease term.

Key features of leasing:

• Ownership – the business will not own the asset during the contract, at the end of the lease term it is returned to the leasing company, unless there’s an option to purchase.
• Payments – regular monthly payments are made, which may be lower than hire purchase fees since they often cover only the asset’s depreciation during the lease period.
• Tax – lease payments can typically be deducted as operating expenses, offering immediate tax relief.
• Flexibility – leasing provides the flexibility to upgrade or change assets more frequently, which is beneficial for assets prone to technological advances or updates.

So, to summarise hire purchase results in ownership and leasing is a simple rental agreement.

Through careful assessment of these factors, businesses can select the financing method that best aligns with their operational needs and financial objectives. If you are still unsure feel free to reach out to one of our business finance specialists. Please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.