• Hire purchase

• Finance lease

• Equipment leasing

• Operating leasing

• Asset refinance

• Contract hire

Hire purchase (HP) of vehicles, plant, or equipment for your business is a similar process to buying a new kitchen or furniture for your home.

HP allows your company to buy a new asset in instalments instead of paying a large, upfront sum. It’s a simpler form of asset finance than equipment leasing, and you end up owning the vehicle or equipment once you finish making the payments. In most cases, the asset appears as a positive item on your balance sheet from the start of the agreement, but the provider owns the asset until the last instalment is paid. This means you cannot sell the asset during the term. A small fee, called the Purchase Option Fee is often required to transfer ownership of the asset to you. This may be as low as £1. With hire purchase, you are responsible for the asset’s upkeep.

A finance lease is an agreement where a leasing firm buys a business asset on behalf of your company and then rents it out to you. You make monthly payments for what’s known as the ‘primary rental period’ until you cover the cost of the equipment, plus interest. You can then choose to extend the rental period, return the equipment, or sell the asset to a third party on behalf of the leasing firm. In some cases, you may share in the proceeds from the sale of the asset. Note that although you may never own the asset, you are responsible for insurance and maintenance costs during the rental period.

Equipment leasing is like finance leasing except you have the option to own the equipment at the end of the contract. Over a fixed term you rent the equipment from a vendor or a leasing firm and make regular scheduled payments for the use of the asset. The leasing firm is responsible for the maintenance of the equipment. At the end of the rental period, you can extend the lease, return the asset to the lender, upgrade the item, or buy it outright by making a balloon payment. Depending on the size of your company and its needs, you can rent everything from laptops and printers to commercial vehicles and machinery.  

Because equipment lease agreements are based on the depreciation of the asset, not the full cost price, monthly lease payments are typically less than hire purchase. However, if you opt to purchase the equipment by making a balloon payment, it may work out more expensive than if you’d purchased the equipment outright.

Equipment leasing can offer potential tax advantages and it tends to suit early-stage companies that don’t have enough working capital to invest in their own assets and established SMEs seeking to upgrade their equipment.

Although similar to finance leasing, an operating lease is usually used for specialist plant or equipment that a company only wants for a limited period or that it never wants to own. You rent the asset over the short or medium term, making regular payments for the time it is in your possession. One of the biggest advantages of this type of lease is that you can upgrade the equipment regularly, sometimes even during the rental period. 

An operating lease may work out cheaper than a finance lease because the cost is based on the value of the equipment but over a much shorter period. The company that rents you the equipment is responsible for its maintenance.

Asset refinancing falls into two categories. In the first category, a company pledges its assets as security against a loan. The assets become collateral. This means the lender may sell the assets to recover their funds if you default on the loan. Once the principal, fees and interest have been repaid, the asset returns free and clear to you. Buildings, land, future contracts, unsold stock, plant, and equipment can all be used as collateral and because the loan is secured by hard assets, costs are usually lower than they are with other types of business financing.

The second category of asset refinance is called asset-based lending, or sale and hire purchase back. In this type of agreement, you sell a hard asset to a specialist finance company for an agreed lump sum. You then lease back the asset from the finance provider – which repays the lump sum. This circular arrangement allows you to free up a large sum of cash, pay it back in small increments over a long period of time, and use the asset during the repayment period.

At the end of the repayment period, the loan may be cleared, but the finance company now owns the asset. You may choose to continue to rent the asset, walk away from the asset, or buy it back for an agreed sum.

Designed for businesses seeking to reduce the time-consuming tasks of sourcing and maintaining their own fleets, contract hire is strictly for vehicles. With this type of asset financing, a provider finds and maintains the vehicles for the business, who then pay regular instalments over an agreed lease term. Fleet management services may be included in the contract hire costs. At the end of the leasing period, the provider assumes responsibility for the disposal of the vehicles.