When you’re starting a business, at some point you’ll have to decide whether to buy your office equipment or use an asset finance option such as leasing or hire purchase agreements to get what you need.And equipment needs can be as basic as a single laptop or you may have more sophisticated needs for specialist hi-tech hardware or require a range of different devices across your business.
Hire purchase (HP) or leasing agreements as finance asset options facilitate immediate access to equipment, you agree to make regular payments over a specific period of time.
Leases differ from hire purchase agreements in that the lessee (the business or individual making the regular payments) does not have ownership rights to the asset. At the end of the lease contract, the lessee is usually offered a choice of extending the lease, returning the asset, or buying the asset for a nominal fee.
Hire purchase is a financing option that works for businesses who want to use an asset without paying the full cost immediately. The customer typically pays an initial deposit, with the remainder of the balance and interest paid over an agreed period of time. On completion when the final payments are made, ownership of the asset transfers to the customer.
What are the main differences between leasing and hire purchase (HP)?
The main difference between leasing vs hire purchase agreements is that at the end of HP contracts, the customer is the legal owner of the asset.
On the other hand, at the end of a lease agreement, the ownership of the asset remains with the lessor (i.e. the company that has financed the assets for you to use). You do have sole use of the asset and you can within the agreed period treat the equipment as though it’s your own.
For both a lease and a hire purchase agreement the customer commits to paying a regular fee, normally charged on a monthly basis.
For both HP and leases, the agreement lasts for a fixed duration which is agreed at the beginning of the contract.
The HP payments would include interest towards financing the use of the asset, different from the price of the asset itself. Hire purchase can be thought of as “rent-to-own” and with a lease you are paying for the right to borrow an asset for a certain period of time in which you pay the lessor (the asset owner) what amounts to the depreciation value of their asset.
With a lease you are effectively the “acting” owner, and the actual owner of the asset can repossess an item should you not be able to fulfil the regular payments and fall into arrears.
Many businesses choose to lease or hire purchase equipment to retain capital and protect their cash flows. They know what the payments will be each month and go into the agreements in the knowledge that they are paying to enjoy the flexibility these deals offer - which is reflected in the price that they pay at the end of the contract duration.
The key difference between a lease and a hire purchase agreement is that at the end of a lease, you return the asset and at the end of an HP agreement, you have the option to purchase and keep the asset.
It is important to note that the accounting and tax treatment of leases varies according to the type of lease it is, so check this with your accountant.
Sometimes, at the end of a hire purchase contract, you can refinance your agreement (extending the deal and payment terms) if you have an outstanding balance to pay, or you can pay the whole balance in a lump sum which is known as a “balloon payment.”
However, in each HP agreement, there will be some sort of agreed-upon balloon payment at the end of the contract period. Typically, the full VAT payable on the “hire” of the asset must be paid over on day one – an important cash flow consideration.
With a lease agreement, on the other hand, once all the lease payments have been fulfilled, the lessee may return the asset back to the lessor, or follow whatever was agreed at the outset.
The depreciation of the asset is treated differently depending on the type of lease agreement, because the lessee is not the legal owner of the asset, the depreciation stays off their financial records and remains on those of the asset owner.
A hire purchase agreement is the opposite because once completed, it will leave the asset under ownership of the user of the asset.
Servicing and any product warranties should be discussed by the purchaser under an HP agreement to see if they can be included in the deal.
Under a lease agreement, the lessor may be responsible for keeping the asset in a fully maintained state - this will depend on what payment options you have negotiated. But the lessee cannot misuse the leased assets, a clause of acceptable use is often included and anything done outside of those terms may mean that it is the lessee’s responsibility to deal with any issues or to keep the assets fully functioning.
The main difference between leasing over hire purchase is probably the flexibility it offers to be able to pick and choose the latest hardware.
Leasing allows you to pay to use the asset and to plan for its return and replacement without due concern over disposal issues.
Overall, being able to use an asset for part or all of its usable lifespan for a specified period of time often works in a company’s favour. On the other hand, HP agreements may mean you own an asset which you may not be able or want to use once your agreement has ended.
Leasing is often a strategy used by those businesses that need niche or speciality equipment or who desire the latest technology.
Benefits of leasing include:
- Spreading the fixed costs over time with no up-front payments
- Opportunity to maximise your tax relief
- Have maintenance, repairs and servicing as a part of the deal
- With a lease, you pass the financial burden of obsolescence to the leasing company
- A leasing company will have access to a wide range of niche products
- Keep pace with more established competitors without having to invest your limited funds
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