Imagine this: your business is thriving, and it’s time to invest in new equipment or a company vehicle. With numerous financing options available, how do you choose the right one? Let’s simplify three popular choices – leasing, contract hire, and hire purchase – to help you make an informed decision without getting overwhelmed by financial jargon.
Leasing
Leasing involves renting an asset (like machinery, a vehicle, or a computer) from a finance company for a specified period. When the lease term ends, you typically return the asset, though there is sometimes an option to purchase it.
Short-term rentals, where payments cover only the asset’s use rather than its full value, are known as operating leases. At the end of the lease, you return the item and can lease a newer model.
Longer-term rentals, where payments cover the full value of the asset over time, are known as finance leases. The leasing company legally owns the item, but you use it as if it were yours.
Advantages of leases include:
- Better cash flow: Low upfront costs and spread-out payments help keep your cash available
- Staying updated: Easily upgrade to newer equipment or vehicles
Considerations with leases include:
- No ownership: You don’t ever own the asset
- Higher long-term cost: Over many years, leasing can be more expensive than buying
Contract Hire
Contract hire is commonly used for vehicles and is similar to leasing, but it typically includes maintenance and servicing in the monthly payments.
Benefits of contract hire include:
- Fixed costs: You’ll know exactly what you’ll pay each month, including upkeep
- Cash flow friendly: Like leasing, it spreads out the cost
Considerations with contract hire include:
- Mileage limits on vehicles: Exceeding the agreed mileage can incur extra costs.
- No ownership: You can’t keep or modify the vehicle
Hire purchase
With hire purchase, you buy the asset over time by making a deposit followed by regular payments. Once all payments are completed, you own the asset.
Benefits of hire purchase include:
- Ownership: At the end, the asset is yours
- Predictable payments: Fixed monthly payments make budgeting easier
Considerations with hire purchase include:
- Higher upfront cost: Requires a larger initial deposit compared to leasing
- Maintenance responsibility: You’re responsible for upkeep and repairs
- Cash flow impact: Higher monthly payments can strain cash flow initially
Making the decision
To choose the best financing option for you, consider the following points:
- Cash flow: How much can you afford each month? Leasing and contract hire usually have lower monthly payments.
- Duration of use: If you need the asset short-term or it becomes outdated quickly, leasing or contract hire might be best.
- Ownership needs: If owning the asset is crucial, hire purchase is the way to go.
- Financial impact: Leasing keeps liabilities off your balance sheet, while hire purchase adds both an asset and a liability.
Choosing how to finance your new asset doesn’t have to be complicated. By considering your business’s cash flow, how long you’ll need the asset, and whether ownership matters, you can pick the best option for you.
Tax implications can also play a role in your decision, we would always advise speaking to your accountant before making the final decision. For personalised advice, please contact the Business Services team from CKLG your Cambridge-based accountants and tax advisers on 01223 810100 or via our contact form for friendly help and support.
