Decision time: Leasing vs Hire Purchase
Need access to new or used equipment? In order to run your day to day operations, you and your staff will inevitably rely on a wide range of tools and equipment. Yet, over time, you may be looking to expand your operations, replace ageing equipment or upgrade to newer models. However, purchasing essential equipment can be expensive, stretching your finances to the limit, but if you’re looking for a cost-effective way to gain access to vital equipment, you have a couple of options available to you. Leasing and Hire Purchase are both popular finance solutions among the SME community, but affect your business in very different ways. So if you’re in need of equipment, here’s what you need to know about Leasing and Hire Purchase in order to make an informed decision.
What are the advantages of Leasing?
Leasing offers a cost-effective means of temporarily borrowing new or used assets, such as equipment, machinery or vehicles, over an agreed term which could last up to 5 years. However, if the asset in question is very expensive some lenders may go further and offer up to 7 years. During this time you’ll need to make fixed monthly rental payments that take into account the asset’s current worth and its predicted worth by the time the agreement matures, plus interest. As such, you’re only paying for having access to the equipment and not its full purchase price, saving your business money in the long-run. Plus, when the agreement matures, you can either return the asset, extend the lease or upgrade to another model. This feature might be useful if the asset rapidly depreciates, becoming obsolete as more advanced models are released.
Finally, depending on your individual financial circumstances, you could reclaim the VAT attached to the rental payments on a quarterly basis. However, in order to clarify your position in regards to any potential benefits, consult your accountant or business advisor before applying.
What are the advantages of Hire Purchase?
Hire Purchase allows you to spread out the total cost of a used or new asset over an agreed term that can typically last up to 5 years. Throughout the agreement you’ll have full access to the equipment, using it in your day-to-day operations, providing you keep up with the fixed monthly repayment scheme, plus interest. Once the agreement matures, with all relevant payments settled, you become the owner of the asset in question.
What are the disadvantages of Leasing?
Although leasing can be very useful, there are a number of other aspects you need to be aware of as well. Leasing is a secured agreement that uses the asset in question as collateral, meaning the supplier can remove the asset from your business if you fall behind with the rental payments. Although none of your other assets will be affected by this, you need to consider how this may affect your business’ operations should the worst happen. Plus, if for any reason you no longer need to use the asset, you’ll still be required to make rental payments until the agreement expires regardless. In addition, depending on the agreement, you may also be required to maintain the asset as well.
What are the disadvantages of Hire Purchase?
When applying for Hire Purchase, the lender purchases the asset that your business requires from a credit supplier, even if you find the same model being sold cheaper elsewhere. Hire Purchase agreements also require you to pay an initial deposit before you can begin using the asset in your business. This typically involves the asset’s full VAT and around 10% of its total purchase price, though this subject to negotiation and can be more or less. Finally, Hire Purchase is a secured agreement which uses the asset as collateral. Although none of your other existing assets are affected, if your business falls behind in the repayment scheme it will result in the asset being removed, as well as the loss of your deposit and any payments that you’ve already made.
Does your business require additional equipment?
Although running your own business is bound to throw up many challenges along the way, acquiring new or used assets needn’t be one of them, especially when there are plenty of funding solutions on offer that could help. However, to reap the full benefit, making sure that you understand them is vital. This is why speaking with a qualified finance professional can prove invaluable. At Rangewell, we’re an Access to Finance specialist working with over 300 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide through the application process. We’re with you every step of the way. So if you’re looking to optimize your business’ performance, apply for Asset Finance today or find out more with Rangewell.