Asset finance: hire purchase vs leasing

Asset finance helps a business get the equipment, vehicles or machinery it needs without paying the full cost upfront. The asset itself usually acts as security, which can make it easier to arrange than an unsecured loan. The two main routes are hire purchase and leasing. This guide sets out the differences.

Hire purchase

With hire purchase (HP), you pay a deposit and then fixed monthly instalments over an agreed term. The finance provider owns the asset until the final payment, sometimes with a small "option to purchase" fee. After that, ownership passes to your business.

Key points:

• You intend to own the asset at the end.
• The asset usually appears on your balance sheet, and your business may be able to claim capital allowances on it. Check with your accountant.
• VAT is normally payable upfront on the full price, rather than spread across the payments.
• Deposits are commonly around 10% or more, though this varies.

HP suits assets with a long working life that you want to keep, such as machinery, plant or vehicles you will run for years.

Finance lease

With a finance lease, the provider buys the asset and rents it to you for most of its useful life. You make regular rental payments and are usually responsible for maintenance and insurance.

At the end, you typically don't take legal ownership. Instead, you may continue renting for a small "secondary" rental, or sell the asset on the provider's behalf and keep most of the proceeds.

• VAT is charged on each rental rather than upfront, which helps cashflow.
• Rentals may be treated as a business expense for tax purposes. Check with your accountant.

Operating lease

An operating lease covers only part of the asset's life. You return it at the end of the term, and the provider takes the risk of its resale value. Contract hire on vehicles is a common example.

• Good for assets that date quickly or that you want to replace regularly, such as IT equipment or fleet vehicles.
• Payments can be lower because you are only paying for the use, not the full value.
• There may be conditions on mileage, condition and maintenance.

Refinancing assets you already own

Some providers will release cash from equipment or vehicles your business already owns outright, by buying them and leasing or selling them back to you. This is sometimes called asset refinance or sale and leaseback, and can be a way to raise working capital.

New or used?

Many providers fund used assets as well as new, though terms may be shorter for older equipment. Specialist or highly customised kit can be harder to fund, because it is difficult to resell.

What providers look at

• The asset itself: its value, expected life and resale market.
• Your business: trading history, accounts and bank conduct.
• Deposit: a larger deposit can improve terms.
• The supplier: providers often pay the supplier directly.

Because the asset provides security, asset finance can be available to businesses that would find an unsecured loan harder to obtain. A personal guarantee may still be requested.

Comparing HP and leasing

Ask yourself:

• Do I want to own it at the end? If yes, HP. If not, a lease.
• How will VAT affect my cashflow? HP usually needs VAT upfront; leasing spreads it.
• How quickly does the asset lose value? Fast-dating kit often suits an operating lease.
• What does my accountant advise on tax treatment for my business?

A quick example

A haulage company needs a £90,000 vehicle. On hire purchase, it might pay a deposit of £9,000 and the VAT upfront, then fixed monthly payments over four or five years, owning the vehicle at the end. On a finance lease, it would pay rentals with VAT added to each one, helping cashflow early on, but would not normally take ownership. On contract hire, it would hand the vehicle back at the end and pick a new one.

None of these is automatically cheaper. The right choice depends on how long you will keep the asset, your VAT position, your tax position and how much cash you want to keep in the business. Your accountant can advise on the tax side; we can show you indicative finance options.

Next steps

Tell us the cost of the asset, whether it is new or used, and any deposit you have, and we can show you indicative options. Figures are indicative only and subject to lender assessment and approval.