When a business is purchasing an asset, for example a motor vehicle or piece of machinery, what are the things to consider when deciding to fund the purchase by leasing or hire purchase?
This is a question we are often asked but the answer depends largely on the business, their cash flow and their long term needs.
The most basic difference between leasing and hire purchase is that at the end of a hire purchase agreement the business becomes the legal owner of the asset (hence “purchase” in the name). At the end of a lease the title (or ownership) remains with the leasing funder.
Depreciation of a hire-purchase financed asset is written into the financial records of the business as the business will be the ultimate owner of the asset. A leased asset cannot be depreciated through the business as the business will never own the asset.
A lease can have an element of maintenance written into it. An asset financed by hire purchase must be maintained by the business, not the funder.
For both leasing and hire purchase, payments need to be made at regular intervals (normally monthly) to the funder.
Which is best?
Leasing is fairly flexible and allows the business to use the asset while it has useful life, but hand it back without having to worry about disposing of it in another way.
Hire purchase means that at the end of the agreement period the business owns the asset in full and can do what it likes with it.
This is in no way an exhaustive guide but aims to give the basics of hire purchase vs leasing.