When businesses want to acquire assets they can either pay for them upfront with cash, or they can finance the purchase (i.e., spread the cost) via a finance lease or hire purchase.

Both finance leases and hire purchases make it possible for businesses to buy the equipment, machinery and vehicles that they need to achieve short-term goals and maximise their long-term success, but what are the differences between them?

Hire Purchase vs Leasing: How do they work?

Leasing: Leasing enables your business to use assets in exchange for rental payments over a fixed or minimum term. At the end of the contract, you can continue renting the asset, return them, or, in some cases, replace the equipment.

There are different types of leasing options. The most common is a straightforward finance lease which means you are responsible for paying for most of the asset’s cost over its life, and you’re also responsible for maintaining the asset as if you own it. You might also consider an operating lease which means you won’t pay for the full cost of the asset as you’re renting it for a period shorter than its useful life. As a result, the lease provider retains the risk and reward of ownership, while you remain responsible for keeping the asset in good working order during the agreement period.

Leasing works where the finance company pays the supplier for the equipment and in turn then becomes legal owners of the equipment, they then lease/hire the equipment back to the end user, the payments are charged plus VAT, which can be reclaimed as normal.  

Hire Purchase: With a hire purchase you agree to buy an asset from the lender but spread the cost over a specified period. You typically pay a deposit upfront and the finance company then charge a regular fixed payment. The last payment has an additional option to purchase fee which transfers legal title to your business. Unlike a lease, you will own the item at the end of the contract.

As the asset is paid for by the finance company, they will want the VAT to be paid up front on the cost of the equipment, this can be claimed back as normal.

Hire Purchase vs Leasing: The benefits

Leasing: There are several benefits to leasing, naturally a big one is retaining cash, why pay out for something upfront when you can pay over time for it. Another significant advantage are the tax savings, Leasing is highly tax efficient method of acquiring equipment whilst spreading the cost of paying for it.

Hire Purchase: You have the legal right over the asset allowing you to claim capital allowances including any enhanced capital allowances that maybe available. Also subject to you making all the payments you will become the legal owner of the asset.

Hire Purchase vs Leasing: What type of assets are best?

Leasing: Any assets can be financed but the majority must be tangible, some funders only require a minimum of 50% tangible others need it to be 80% plus. The benefit is that a lot of intangible items can be incorporated into the finance. This form of finance tends to suit assets that depreciate in value so can be refreshed at the end of the finance agreement.

Hire Purchase: Assets that retain their value are generally financed under this method, because at the end of the finance ownership will be retained. Also should the end user want to utilise enhanced tax allowances then they would use this method.

Hire Purchase vs Leasing: What rates am I likely to pay?

This depends on the credit rating of your organisation along with the amount being financed, the better the credit rating and bigger the lend the better the rate.

Hire Purchase vs Leasing: What’s the tax treatment?

Leasing: 100% of the repayments are allowable against taxable income. For example if your taxable profit is £100,000 and the tax rate is 19%* you will pay £19,000 in tax. If you were to make £20,000 in lease payments then you would pay 19% of £80,000 i.e. £15,200 in tax, saving you £3,800 in tax.

*Corporation tax is due to increase to 25% on 1^st April 2023.

Hire Purchase: The asset is classed as owned by the company so they will claim capital allowances as they would normally do for any other asset they own. They can also claim the interest paid on the finance against taxable income.

Hire Purchase vs Leasing: What are the potential risks?

Leasing: You do not or will never legally own the asset, so if asset ownership is your thing then this will not be the product for you.

Hire Purchase: If you do not have any enhanced capital allowances gaining full tax deduction for the purchase of the asset can take an exceptionally long time, also the VAT needs to be paid upfront so needs to be factored into cash flows.

Hire Purchase vs Leasing: What happens at the end of the arrangement?

Leasing: At the end of the agreement, you must cancel the agreement with the funder. Once this happens, rather than to continue to pay rent you can pay a one-off infinite rental to retain uninterrupted continued use of the asset(s) allowing you to do what you want with the asset(s).

Hire Purchase: Once all the payments are made (including the fee) the agreement ends and your business takes ownership of the asset.

Choosing the best option for your business

Whether you pursue a finance lease or hire purchase, your business will need to be approved by the lender to ensure you are able to afford the payments throughout the contract. It’s worth noting that if the asset you intend to finance is likely to generate additional revenue for your business that will put your business in a stronger financial position, and lenders can take this into consideration.

If your business has a poor credit rating, this may make it more complex to apply for finance and/or increase the interest rates that you will pay, but it will not necessarily prevent you from securing finance.

REMEMBER…

Before entering into any finance agreement, it is important to consider potential risks. For example, lenders will need to carry out credit checks when reviewing your application and this may impact your business’ credit report. There may also be additional charges to pay, depending on the terms, and if you default on payments, you may lose the asset and damage your credit rating.

Bluestone can help your business to obtain the right funding solutions and facilities, quickly and efficiently, whilst ensuring your short-term goals and long-term ambitions are considered in your financial strategy.

If you are interested in financing assets for your business, get in touch with us today. We will assess your business’ short-term challenges and long-term ambitions and work with you to decide which finance solution would be the right choice.

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