Finance Lease or Hire Purchase?
- Matthew Martin
- Feb 20, 2024
- 2 min read
Updated: May 29, 2024
What is the difference between a Finance lease Vs Hire Purchase agreement?
Finance Lease and Hire Purchase are both methods of financing and acquiring assets, but they have some key differences in terms of; ownership, accounting treatment, and flexibility. This article just gives you an overview of the main differences between the two:
Ownership of the Asset
Finance Lease: In a Finance Lease, the lessee (the one acquiring the asset) is not the legal owner of the asset during the lease term. However, the lessee has the right to use the asset and usually bears the responsibilities of maintenance and insurance.
Hire Purchase: With Hire Purchase, the hirer (buyer) has possession of the asset from the beginning of the agreement, but legal ownership is transferred only after the final payment is made.
Flexibility
Finance Lease: With a Finance Lease because the VAT is spread throughout the monthly payments it means you can put down very little deposit. It’s common to find these are usually either 1 or 3-month rental payments as an advance.
Hire Purchase: With a Hire Purchase, you are taking ownership of the equipment. This will result in you needing to pay the VAT element as a deposit minimum. This can result in a dent in your cash flow. There is also an option for VAT deferral which is typically 3 months.
End of Term Options
Finance Lease: On a typical finance lease there are a number of options available at the end of term:
• Continuing Leasing equipment – via a monthly or annual payment
• Return the equipment
• Take title and Ownership via a third party sale
Hire Purchase: Legal ownership is transferred to the hirer after the option to purchase fee has been paid, this is typically a peppercorn payment (nominal payment).
When choosing between a Finance Lease and Hire Purchase agreement, businesses often consider factors such as cash flow, accounting treatment, the nature of the asset and long-term objectives. It's advisable to consult with financial professionals to determine the most suitable financing option based on specific business needs and financial goals.
I hope this gives you a clearer understanding of the two types of asset funding. If you need more information, feel free to give me a call at 01908 086151 or email me at matthew@approved-finance.co.uk and I’ll be happy to help.
