Purchasing new business assets such as equipment, machinery or vehicles outright often comes with a high upfront cost that most businesses can’t afford outright.
That’s why businesses of all sizes and sectors spread the cost of new assets over time with asset finance. This lets you put your new assets to use without exhausting your working capital.
There are two main types of asset finance: hire purchase and leasing. Each one functions slightly differently and comes with its own set of benefits
Join us as we explore the differences between hire purchase and leasing to help you figure out which is right for your business.
(Is this your first time exploring asset finance? You might want to start with our What is asset finance? blog first!)
Hire purchase
What is hire purchase?
Hire purchase asset finance is a type of credit agreement in which you buy an asset from a lender over a fixed period. During this time, you make monthly payments, often at a fixed interest rate.
You get to use the asset during your hire purchase repayment period, meaning you can use it to boost your revenue right away. And at the end of your agreement, you’ll either own the asset or have the option to buy it outright with a final payment.
Benefits of hire purchase
- Asset ownership: Rather than make a large lump-sum payment, you can spread the cost of the asset over time and claim full ownership at the end of your payment period.
- Fixed interest: The interest rates on hire purchase agreements are typically fixed for the entire repayment period regardless of changes to the Bank of England base rate
- Easy growth: You can access valuable equipment far outside of your price range while still retaining the working capital necessary to find day-to-day operations
Disadvantages of hire purchase
- Fixed duration: Since you agree to a fixed repayment period, unexpected financial difficulties may result in seizure of your asset and damage to your credit rating
- Higher overall cost: By the end of your repayment period, you will have paid more than the asset’s market value due to interest payments
- Long contracts: Hire purchase agreements are often 3-5 years or more, making them a poor choice for assets that depreciate quickly or are likely to be outclassed due to advancements in technology
Asset leasing
What is leasing?
An asset leasing contract functions as a rental agreement. You make monthly payments to rent the asset for a fixed or minimum term.
At the end of your contract, you can continue renting the asset, return it or start a new contract for a better model.
There are two types of asset lease agreement:
- Finance lease: Also called capital leasing, the leasing company lets you use their asset and might offer a transfer of ownership at the end of your contract. It’s a longer-term contract in which you take responsibility for the asset’s running costs and maintenance. A finance lease is a popular option for businesses who want to finance assets with a long working lifespan such as heavy machinery.
- Operating lease: A short-term lease that grants use of an asset for part of its working lifespan. You pay less than the asset’s value, and since ownership lies with the leasing company they remain responsible for running costs and maintenance. The asset never appears on your balance sheet, meaning you can offset your rental payments against the additional revenue the asset generates. When an operating lease involves a commercial vehicle, it’s often known as a business contract hire.
Benefits of leasing
- Fewer responsibilities: Since you don’t own the asset, you’re not liable for its depreciation. And in some contracts, the leasing company will replace the asset outright if there’s a problem
- Lower costs: An operating lease lets you use the asset to increase your revenue without paying its full value, helping you save money overall
- Short lease: The shorter length of the lease means you can regularly replace the equipment. This makes it ideal for assets that you only need for a limited time or that quickly become obsolete
Disadvantages of leasing
- Lack of ownership: While this can be beneficial, it also means you’re paying for an asset without benefiting from its appreciation or residual value at the end of your lease term
- Usage restrictions: The leasing company may impose restrictions on how you can use or modify the asset, and may charge for early termination
- Not always cheaper: If you keep renewing the same lease agreement for a long time, the monthly fees and interest payments may eventually exceed the cost of hire purchase
What’s the difference between hire purchase and leasing?
The main difference between hire purchase and leasing is who owns the asset.
With hire purchase, ownership passes to the company hiring the asset. But with a lease, the leasing company retains the ownership right throughout your contract.
Similarly, while a leasing company may offer the option of ownership at the end of a finance lease agreement, it doesn’t occur automatically as it would with hire purchase.
Which is better, hire purchase or leasing?
Which of these two asset finance options best suits your business depends on how long you plan to use the asset.
If the asset has a long working lifespan and you’ll need to use it frequently moving forward, hire purchase is probably the right option.
But if you only need it for a limited time or expect to replace it frequently, leasing tends to be more suitable.
You’ll also need to consider the depreciation rate of the asset to ensure the option you choose is financially viable.
How do I apply for asset finance?
With Kane Financial Services, you can apply for asset finance online!
Complete our online asset finance application today and we’ll get back to you as soon as possible to discuss your options, including hire purchase and leasing.