The Difference Between Hire Purchase and Leasing

By Richard Mitchell
Content writer
Last update: 12 April 20221 minute read
The Difference Between Hire Purchase and Leasing

Making the most appropriate choice for your equipment needs

Whatever your line of business, having the right tools for the job is essential. No matter what sector or industry your business works in, keeping your day-to-day operations running smoothly requires a vast assortment of equipment. 

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If your business is desk-based, you need a computer - and the desk itself. If you are a dentist looking to purchase dental equipment, you will need your drill, a chair and your x-ray machine as a minimum. A skilled woodworker will need hand and machine tools. And, most businesses will need a vehicle to run smoothly.

From high value, high technology equipment to chairs and the kettle for coffee breaks, your business depends on a huge range of items, and these are collectively known as assets.

And when your business needs new or replacement assets, asset finance - a specialist finance product - can be the most cost-effective way to provide them.

What is Asset Finance?

Buying all the equipment or assets your business needs for cash means a major capital investment. When it’s a big item, like a van or a machine tool, most firms don’t have the funds readily available as cash. However, asset finance could provide an alternative solution.

This type of funding differs from a conventional loan in one important way. With a conventional business loan, you will either need to pay a relatively high rate of interest for credit with an unsecured loan or, alternatively, offer security - something that the lender will take and sell to cover their losses if you are unable to repay. This can be key business equipment, your premises or even your home. The thought of putting your home at risk is daunting, but it does mean less risk for the lender and results in a lower repayment for you.

But asset finance can provide the ideal solution of a low rate without putting your home or other key items at risk. This is because the funding is secured on the asset itself. So, if you're buying a key piece of equipment - such as a van - and can’t keep up the repayments because of a downturn in business, the lender will simply take back the van. The lending is ‘secured’ against the equipment or asset you buy. 

Asset finance covers a number of funding arrangements, all of which let you spread the cost of the things you need, and all of which share this technique for reducing your costs. The two most popular are Hire Purchase and leasing.

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Hire Purchase – spreading the cost of buying

Hire Purchase - or HP - is a simple way to spread the cost of buying an asset for your business. A positive with this type of asset finance is that the piece of equipment is already working to make your business money while you pay for it. It is, in effect, paying for itself. 

After making an initial deposit of around of 10% of the asset’s value, you will pay fixed monthly instalments for the agreed term, which generally lasts between 12 and 72 months. The instalments will cover both interest payments and a proportion of the amount borrowed.

The asset becomes your property as soon as the final payment is made. 

This can make HP the ideal solution for items you want to keep. These can be durable items with a long service life such as catering equipment or production machinery, and key business items from a dentist’s chair to a tractor.

However, buying an item can mean being left with an obsolete or worn-out piece of equipment which will become a liability for your business when better and newer models become available.

Leasing - renting the latest equipment

You may prefer to lease equipment. A lease is an agreement conveying the right to use the asset for a period of time set out in the contract. The party that gets the right to use the asset is called a lessee and the party that actually owns the asset, but leases it out, is called the lessor.

There are two main types of leases.

Operating Leases

Operating Leases work like a rental agreement. The piece of equipment will not become yours, but you will pay a monthly rental charge to use it. This can have some advantages when it comes to company accounting, as you will never need to make a capital expenditure on the asset.

Maintenance, repairs and registration can be the responsibility of the leasing company. Operating leases can be ideal for technical equipment with a limited life that you do not wish to own outright. Some types of medical and scientific instruments, which may quickly date, may be suitable for an operating lease, as it means you can upgrade and replace them much more easily.

Finance Leases

Finance leases also let you borrow equipment for a set time, but maintenance, repairs and running costs will become your responsibility. Finance leases are common with larger assets, such as complete factory plant installations.  

Getting the solutions you need 

Asset finance can let you spread the cost of all kinds of business equipment, so naturally, this means there are many different types of asset finance and many different providers. However, not all providers work in every sector, and terms and rates vary substantially.

Getting the right type of finance for your needs is essential. 

At Rangewell, our team includes experts in this type of funding. They can help you find the most appropriate kind of finance arrangement, the lenders who work in your sector, and the most competitive deals. 

To find out more about working with Rangewell to find better answers to your HP and leasing needs, simply call us or apply today. Our service is free.

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