What is the difference between Hire Purchase and Finance Lease?
When businesses want to acquire assets they can either pay for them upfront with cash, or they can finance the purchase (i.e. spread the cost) via a finance lease or hire purchase. Both Finance Lease and Hire Purchase agreements can cover a range of different business equipment, including both hard and soft assets. However, there are a few differences between how a finance lease and a hire purchase deal work. In this blog we’ll explore the main differences between the two and what are the benefits.
What is a Finance Lease?
With Lease Financing (also known as leasing), the funder purchases the asset and leases it to you in exchange for monthly payments over an agreed period. At the conclusion of this rental agreement you may be able to extend the lease, upgrade to a similar item, or return the asset.
What is Hire Purchase?
Hire Purchase refers to the agreement to acquire an asset from the lender over a specified period of time. Once the repayment period is up you can then own the item at the end of the contract. Hire Purchase contracts usually involve an initial lump sum at the start of the term, fixed payments over the course of the agreement and a final payment at the end of the term to secure the final purchase.
Benefits of Hire Purchase
Immediate use without full payment: By spreading the cost of the asset, you can use the product immediately without having to pay the full amount upfront.
Ownership: Unlike leasing, this form of asset financing allows you long-term access to new machines, cars, and equipment right away. After the last payment is made, you will be the owner of the item.
Control: A Hire-Purchase arrangement gives you complete control over the asset, after the last payment is paid you can do what you want with the asset including using it for many more years to come or even sell it.
VAT Deferrals: A Hire Purchase may give you the ability to negotiate on a VAT deferral, which could help with reducing the upfront capital costs.
Benefits of Finance Lease
Cheap starting cost: Fast acquisition of the required asset. Rather than requiring a sizable upfront payment, you can protect your working capital by spreading the cost over monthly installments.
Repairs and Replacements: As part of the agreement terms, the leasing company may assume responsibility for repairs or replacements if the asset needs them or if a newer model replaces it. They may also offer support services like maintenance.
Technology upgrades: If you anticipate needing frequent upgrades due to technological advancements or changing business needs, leasing, which typically involves shorter terms than hire purchase, maybe the better option.
Flexibility: The lease terms and rental payments may be amended to better suit your financial situation.
Tax benefits: VAT does not have to be paid upfront and can instead be spread across the monthly repayments. Providing your company is VAT registered, VAT can be reclaimed on the cost of the asset.
Main difference between Hire Purchase and Leasing
The principal difference between leasing and hire purchase is the ownership of the asset. When leasing, the leasing company retains ownership of the asset. In contrast, with a hire purchase, ownership of the asset is transferred to the business hiring the asset. When deciding between a lease and a hire purchase agreement, consider your long-term needs for the asset. Generally, the longer you need the asset, the more attractive a hire purchase becomes since you can spread the cost over a longer period.
Get started with Asset Finance today
At Time Finance, we work with Asset Finance brokers all over the UK to provide their clients with financing options that support their business growth and investment plans. To learn more about how Asset Financing can work for your clients or to enquire about an existing proposal you have, get in touch with our team of Broker Managers today.