Leasing: Hire purchase and finance - what is the difference?
What to look out for
- Red With leasing you don’t automatically own the asset outright
- Amber If your equipment breaks down or is updated, the leasing company may provide a replacement
- Green The asset is effectively security, lenders ask for personal guarantees less frequently
Discover the benefits of leasing a business car, commercial vehicle, van or computer and how leasing differs from hire purchase.
I need to get hold a van but am worried about the hit on my cash flow?
Leasing is another popular asset finance model which is ideal to fund a business car, commercial vehicle or even a computer or printer leasing arrangement. Consider the benefits of leasing and maybe this will help with your buy or lease a van dilemma.
How does leasing differ from hire purchase?
An SME can buy an asset in small instalments while making use of it with hire purchase and once the repayments are finished you own the asset.
With leasing you don’t automatically own the asset outright. When the set and agreed leasing period comes to an end, you may have an option to buy e.g. the machinery. Alternatively, you could start a new lease arrangement with a different, perhaps updated truck or van.
With leasing, if your equipment, asset or machinery breaks down or is replaced by a newer model, then the leasing company may fix or update it. Plus, the leasing company may offer some kind of support for the asset e.g. servicing.
One word of caution: make sure you read the terms and conditions of the lease carefully. Some agreements carry early termination fees.
What are the two different types of leasing?
Operating lease and finance lease. Let’s start with a finance lease and use a fork lift truck as an example.
What is a finance lease?
Think of finance lease as a kind of loan. It’s an arrangement where a business pays to use an asset for the maximum extent of its economic lifetime. With a finance lease, the risks and rewards associated with the farm tractor belong to the leasing organisation. The lessee is considered the owner of the tractor and it appears on the balance sheet. Whilst you will usually benefit from depreciation for tax purposes, you won’t be eligible for Capital Allowances.
What is an operating lease?
With an operating lease, the company leasing a printer – i.e. you - does so for a term that is less than its economic life. Think of an operating lease as renting the printer. All the risks and rewards associated with asset ownership remain with the lessor, not you and at the end of the lease, you will no longer be able to use it. Repayments are treated as operational expenses and the printer doesn’t appear on the company’s balance sheet.
How leasing can help your business keep its cash back
Yes, because the asset is effectively security, lenders ask for personal guarantees less frequently.
It’s also worth mentioning that some assets serve the business over a long period of time, so it makes sense to pay for them over a period. Many large, well established businesses with good cash balances still fund purchases in this way, thus keeping their cash back.