Every company needs assets to operate. These assets could include company vehicles, plant and machinery, equipment, software, hardware, furnishings, etc.
When acquiring assets, a business has three options: buying, leasing or hire purchase (HP). The latter two options are often favoured for making the purchasing cost more manageable by breaking it into regular instalments. It eases cash flow pressure on companies.
However, there are considerations before entering into leasing or HP. It is also crucial to decide which option is best for you.
Our guide explores the critical differences between leasing and hire purchase and which might suit your needs best.
- What is the difference between leasing and hire purchase?
- Which is more cost-effective?
- Questions to ask when deciding whether to lease or hire purchase
- Accessing leasing and hire purchase for your business
What is the difference between leasing and hire purchase?
Leasing and hire purchase share similar characteristics. In both cases, a lender will cover the cost of the obtained asset, and you will pay it back with regular instalments plus interest. You will have use of the equipment during this time. If you fail to keep up with the repayment schedule, the asset will be seized back by the provider.
The main difference is what happens at the end of the leasing or HP period.
In a leasing scenario, you rent the equipment for an agreed timeframe (as outlined in the contract terms). Once the contract ends, you will have the option to extend the contract at a much lower cost, pay a fee to acquire the asset or return it to the lender.
When using an HP agreement, you will still make regular repayments for a set period, but you own the asset from day one and it sits on your balance sheet.
Which is more cost-effective?
The leasing or hire purchase agreement cost will vary between lenders and the assets you seek. You must always shop around providers to find the most competitive deal for your needs.
In most situations, leasing will be cheaper. In a HP agreement you will also pay a deposit of 10-20% and the instalments may be higher.
It is worth noting that both HP and leasing will see you pay more than if you had bought the equipment outright. Once interest and other charges are factored in, it will of course work out more expensive, even if this is broken into more manageable instalments compared to paying for it outright.
Deciding which option is most cost-effective will depend on your specific goals with the acquired asset, which is why it is crucial to ask the right questions.
Questions to ask when deciding whether to lease or hire purchase
Answering the following questions will enable you to understand your needs and what is the best option for your business.
Do you want to own the product eventually?
Some businesses will want to own the product as it enables them to add it to their balance sheet while gaining long-term control.
If this applies to you – or you at least want to keep the option open – hire purchase is the best solution
Other only want products for a set period as it enables them to experiment with different types of equipment and upgrade to newer models – in which case leasing is ideal.
What can you afford?
Hire purchase tends to have higher monthly repayments. You also need to account for a deposit upfront.
These requirements may affect who is eligible for HP. If you don’t think you can afford the costs, it is worth considering leasing instead.
Your affordability will also be a key factor when comparing different lenders, so you find one that meets your criteria and doesn’t lead you into debt.
- Are optional extras included?
Some contracts (most commonly leases) offer extras that are either included in your repayments or available for a small additional cost. Examples are maintenance and servicing of your assets.
These services are helpful as it keeps your equipment in good working condition during the lease period, allowing you to generate value and productivity.
Check the contracts available to you to determine if there are any such inclusions, as it could guide your decision.
How long do you need the assets?
If you aren’t sure whether you want to own assets or not, a better question to ask is how long you need them.
Most leasing contracts will only last for only 2-3 years. If you are likely to need the equipment for longer than the agreement allows, HP’s ownership option may be much more attractive.
Compare the length of the arrangements available and determine if there are any that suit you. It’s also worth checking if there are extension options. If none seem long enough, the ability to own the asset through hire purchase could help.
Who is the best lender?
As you shop around various leasing and HP lenders, deals may stand out. If you don’t have a strong preference between either type, the best option will be to go with the contract that appeals to you most.
Factors like contract length, interest rates, fees and the overall cost will allow you to find the most competitive deal for your business.
In some cases, the asset you want might only be available through specific lenders or contract types which will force your hand.
Are there fees to be aware of?
Before committing to a lease or hire purchase arrangement, you must check the fees. Some contracts will have administrative charges to pay on top of your regular repayments. These fees may be used to compare offers.
Some arrangements will have early termination fees, which charge you if you try to exit the agreement before the designated end date. It’s worth checking for these, especially if you believe you might want the option to leave the contract early.
Is buying better?
Buying is often the best choice if you want to acquire an item for the long-term in the most cost-effective manner.
Of course, not every business can afford to buy equipment outright. However, if yours does, it is ideal as owned assets will add value to your balance sheet, work out cheaper in the long run and give you total control.
It may be possible to secure commercial loans that help you to cover the cost of buying assets and make it more affordable.
Accessing leasing and hire purchase for your business
Leasing and hire purchasing are both valuable options to acquire assets and make the cost more affordable. There is also the option to buy the equipment outright.
However, there are considerations to determine which route is most suitable for your business. Understanding your needs – including how long you need the equipment, whether you want to own it eventually, and the overall cost – will allow you to make the right choice.
If you seek a leasing or HP arrangement for your company, a financial specialist like Pegasus Funding can take you through your options.
We help you to find the best path for your business and identify a lender that suits your needs.