Two popular financing options for business assets are hire purchase and leasing. Both have their benefits and drawbacks. Your choice will impact your company's cash flow and asset ownership in different ways. This article explores the differences between hire purchase and leasing. This will help you make informed decisions that best suit your operational needs and financial strategies.
What is hire purchase?
Hire purchase is a type of asset finance where a business purchases an asset. There is typically an initial deposit followed by regular instalments. The business effectively hires the asset until the final payment is made, at which point ownership of the asset transfers from the lender to the business.
Advantages of hire purchase
- The biggest advantage of hire purchase is that the business owns the asset at the end of the payment term. This can be beneficial for the acquisition of assets that have a long useful life and when the business intends to use it without restrictions.
- Although the upfront cost can be higher than through leasing, hire purchase can be less expensive over time, especially if the asset retains its value.
Disadvantages of Hire Purchase
- Hire purchase agreements typically require an initial deposit, which impacts a business’ cash flow.
- The business is committed to keeping the asset until all payments are made, which can be a disadvantage if the asset becomes out of date or no longer meets the business’ needs.
What is leasing?
Leasing is a method of accessing an asset without owning it. The business pays to use the equipment or asset for a particular period, during which time the leasing company retains ownership. At the end of the lease term, the business may have the option to renew the lease, return the asset, or purchase it at market value.
Types of leasing available
Businesses can choose from different types of leasing options. Here’s an overview of the terms of two main leasing types:
- Best suited for short term needs
- The lessor retains all risks and rewards of ownership. The lessee enjoys use of the asset without the financial burdens of ownership.
- This lease type is ideal for businesses seeking flexibility in equipment use, without the risk of depreciation or long term commitments.
- Designed for long term usage, this lease option is a good fit for businesses that plan on using an asset for most or all of its useful life.
- Transfers the risks and rewards of ownership to the lessee.
- At the end of the lease term, the lessee typically has the option to purchase the asset at a residual value. This lease is particularly suitable for businesses that want the benefits of ownership, and prefer to spread the cost over time.
Advantages of leasing
- Leasing offers greater flexibility than hire purchase agreements, with options to upgrade or replace equipment as needed.
- Generally, leasing requires no large upfront deposit, which can help preserve cash flow.
Disadvantages of leasing
- Depending on the type of lease, the business will not benefit from any residual value the asset might hold after the lease ends.
- If the terms stretch over a long period of time, leasing the asset could end up costing more than buying it outright.
Choosing the right option for your business
The decision between hire purchase and leasing depends on your business’s financial situation, whether ownership is important to you and the asset type. Here are key considerations:
- Asset depreciation: If an asset is likely to depreciate quickly, leasing might be a better option to avoid owning obsolete equipment.
- Cash flow: If preserving cash flow is a priority, leasing can help avoid the substantial initial payment associated with hire purchase.
- Long term usage: For assets you plan to use for a long time and that hold their value, hire purchase might be more cost effective.
Both hire purchase and leasing can be useful options for businesses looking for asset finance. Consider the pros and cons of each to assess whether they align with your business’ strategy, ensuring it supports your operational needs and growth ambitions.
If you’re considering acquiring an asset for your business, you can explore a range of choices with Capitalise. Working with a panel of 100+ UK lenders, our funding specialists can help you to find a lender and option best suited to your needs. Just search for funding to get started.
