Imagine this: your business is booming, and it’s time to invest in some new equipment or a company vehicle. But with so many financing options out there, how do you decide which one of them is right for you? There are three popular choices – leasing, contract hire and hire purchase, so you can make an informed decision without getting lost in the financial jargon.

Lease

Leasing means renting an asset (such as machinery, vehicle or computer) from a finance company for a set period. After the lease term ends, you usually return the asset, although sometimes there is an option to buy it.

Short terms rentals where the payments cover the asset’s use, rather than its full value, are known as operating leases. At the end of the lease, the asset is returned and you can lease a newer model.

Longer terms rentals where the payments cover the full value of the asset over time are known as finance leases. The leasing company legally owns the items, but you use it as if it is yours.

Benefits of leases:

  1. Better cash flow – low upfront costs and spread out payments help keep your cash in hand.
  2. Stay up to date – you can easily upgrade to newer equipment or vehicles.

Areas of consideration:

  1. You will not own the asset.
  2. Higher long term cost – Over many years, leasing can be more expensive than buying.

Contract Hire

 

Contract hire is often used for vehicles and is similar to leasing but usually includes maintenance and servicing in the monthly payments.

Benefits of contract hire:

  1. Fixed costs – you know exactly what you’ll pay each month, including upkeep.
  2. Cash flow friendly – like leasing, it spreads out the cost.

Areas of consideration:

  1. There may be mileage restrictions on vehicles. Exceeding an agreed mileage can cost extra.
  2. No ownership – you cannot keep or modify the asset.

Hire Purchase

With hire purchase, you buy the asset overtime. You will pay a deposit and them regular payments over an agreed length of time. Once the payments are made, you own the asset.

Benefits of hire purchase:

  1. You will own the asset at the end of the term.
  2. Fixed monthly payments making budgeting easier.

Areas of consideration:

  1. Bigger upfront costs for the deposit compared to leasing.
  2. You are in charge of the items upkeep and repairs.
  3. Higher monthly payments can strain on cash flow initially.

Making the decision

To choose the best option for you, you may want to consider the following points:

  1. Cash flow: How much can you afford each month> Leasing and contract hire usually have lower monthly payments.
  2. How long you will use it: If you need the asset short-term or it becomes outdated quickly, leasing and contract hire might be the better option.
  3. Ownership needs: If owning the asset is crucial, hire purchase is the way to go.
  4. Financial impact: Leasing keeps liabilities off of the balance sheet, while hire purchase adds both the assets and a liability.

Choosing how to finance your new asset doesn’t have to be complicated. By considering your business cash flow, how long you will need the asset and whether ownership matters, you can pick the best option for you.

Taxation will also need be considered when making the decision and what works best for your business, please feel free to contact our Tax Team in our Taunton office at any time and our team of experts will help navigate the complexities of asset financing and find the best solution for your business.