If you need to buy an asset for your business, you don’t have to purchase it outright. Instead, there are a number of funding options available that may help you obtain asset in a way that works well for your business.
Finance for assets helpfully comes under the heading of ‘asset finance’. While there are various different forms of asset finance – each designed to suit particular circumstances and requirements – the most common are hire purchase and leasing.
In this article we’ll have a look at both these funding options and explain some of the main differences between the two.
Let’s say you need a new van. In a nutshell, hire purchase is buying the van outright, but spreading the cost over a set period of time.
On the other hand, with leasing you’re essentially renting the van for a period of time, and at the end of the lease you’ll give it back – although some lease arrangements do have an option to buy at the end.
Hire purchase explained
Hire purchase is a simple finance solution if you know you want to buy, and eventually own, an asset for your trade business but you don’t want to pay for it all in one go. This could be because you can’t afford the lump sum, or because you’d rather not have that amount of money tied up in one go.
If you buy a van on hire purchase, you will effectively own the asset from the day the contract starts. This means all the responsibilities of owning a vehicle will be yours from the outset – so any maintenance, servicing and insurance will be down to you.
If you default on your repayments, the lender is entitled to recover the van in order to settle your debt. At the end of the term, your relationship with the lender comes to an end and the van is 100% yours to do with as you will.
From an accounting point of view, anything you buy on hire purchase will appear on your balance sheet as an asset from the day the contract begins.
Leasing, also referred to as equipment leasing or contract hire, is essentially renting an item, rather than buying it. The main differences to our example of hire purchase are that you will never own the van, and you usually don’t assume the responsibilities of ownership.
With leasing, you’re paying for the convenience and flexibility of renting the van for a period of time. Tasks such as maintenance, servicing and sometimes insurance can be organised by the lender and included in your monthly payment.
When the term of the lease ends, you can give the vehicle back, or start a new lease for an updated model. Depending on the lease, there is sometimes the option to buy, which will then take into account the amount you have already paid towards the cost of the asset.
In contrast to hire purchase, assets on a lease are accounted for as an operating cost, and are therefore written off against your business’s gross profit, which might make a difference to your tax position — it’s worth discussing the detail with an accountant.
Hire purchase or leasing – which is best for my business?
Hire purchase and leasing each have different features. We could refer to them as benefits, but what is seen as a benefit for one business could be a downside for another. It all depends on your requirements and circumstances.
Hire purchase is very simple and straightforward. It affords you the luxury of being able to spread costs over a number of months or years ― although there is usually an upfront deposit to consider. While you will end up paying more than the ticket price in return for that flexibility, this could still be a cheaper option than leasing, especially if your usage is light and you know you want to keep the asset long-term.
Although you have the responsibility for maintenance and servicing, it can be cheaper to pay for this as and when you need it, with your chosen provider, rather than paying a monthly arrangement as part of a lease.
Leasing works very well if you only need your asset for a short period of time, the asset depreciates quickly, or you need to regularly upgrade your equipment. Pretty much anything can be leased these days, from cars to gaming machines, and there are different lenders specialising in different items.
Not having to worry about extras such as maintenance and servicing can be a great help when you’re busy running a business, but it’s important to bear in mind that leases do have various restrictions.
If you’re leasing a van for example, there may be an annual mileage limit that you need to stay within, and you might be restricted if you want to brand the vehicle or make other modifications like adding a bulkhead. So, while leasing means you can get a new van every few years, this will only work if all the terms are suitable for your specific needs.
The flexibility of leasing also comes at a cost ― but it might be a price you’re willing to pay if the alternative would mean constantly buying and selling equipment.
Hopefully this article has given you enough of an overview of hire purchase and leasing to help you decide which might be worth pursuing. As with any finance decision for your business, the right funding option will come down to what’s available to you, how much it costs, and how it impacts on your future growth plans.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions