Leasing and Hire Purchase are the most popular forms of Asset Finance in the UK. They allow businesses to acquire equipment, machinery and vehicles which would otherwise be unaffordable, or put a strain on working capital.
Only bank overdrafts and credit cards are used more frequently by SMEs than Leasing and Hire Purchase
Key requirement
For approval, you must be able to demonstrate your ability to fund the Hire Purchase payments or fulfil the Finance Lease rental payments
Key benefit
The process is quick, especially for common items like vehicles
Key consideration
Do you want to own the equipment at the end of the contract?
What is Leasing & Hire Purchase?
Leasing and Hire Purchase are two of the most popular forms of finance in the UK, behind only bank overdrafts and credit cards in terms of SME use.
They allow businesses to get vital equipment and machinery without large upfront costs that can put a strain on cashflow and working capital.
Hire Purchase contracts usually involve a deposit and fixed payments over an agreed term.
A Lease (either a Finance or Operating Lease) allows the business to use the asset in exchange for rental payments, which may include an advanced rental, over a predetermined period.
“It does the job that businesses need it to, allowing them to get the asset on board quickly and simply so they can start using it within their business.”
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Sam Dring Senior Manager, Asset Finance at Lloyds Commercial Banking |
What is Hire Purchase?
Hire Purchase is where the borrower agrees to purchase an asset from the lender over a specified period. You own the item at the end of the contract. Usually, there is a small fee at the end of the contract to secure title to the asset.
What is Leasing?
A Finance Lease works as a rental agreement. The business will agree to a fixed or minimum term rental period for an asset and make regular rental payments for the duration of the Lease contract. At the end of the contract, the business may have an option to continue renting, or to return or possibly replace the equipment.
Who’s involved?
The application process is simple for Finance Lease and Hire Purchase. Businesses can apply directly to a finance provider, from the equipment provider or manufacturer or through a broker.
Who is eligible for Leasing and Hire Purchase?
There are few restrictions on who or what type of business can apply for Leasing and Hire Purchase finance and there are few business assets that you cannot fund through Asset Finance.
The biggest factor in approval for Leasing and Hire Purchase is proving your ability to make the rental payments. And even then, you don’t necessarily need to be profitable, just cash positive.
Providers can also consider the revenues that the asset investment may generate for your business and the impact that it will have on your ability to service the rentals.
Another important factor is your credit rating. A poor credit rating could make approval more difficult but it’s not always a barrier to approval.
Annual Investment Allowance
Through your annual investment allowance (AIA), you can deduct the full cost of items from your profits before tax. The AIA amount has increased from £200,000 to £1,000,000 until January 2021, and is available on items you buy under a hire purchase contract.
Learn more about your AIA.
Benefits of Leasing and Hire Purchase
High rates of approval
Success rates are high for Leasing and Hire Purchase applications.
Quick turnaround
Turnaround for Leasing and Hire Purchase deals are quick. For standard pieces of equipment, like a vehicle, it could take just a few days.
Limited restrictions
You can access Leasing and Hire Purchase regardless of your sector or location, size or age of your business.Advice
There are lots of sources of advice for Leasing and Hire Purchase, ranging from brokers and equipment provider to banks and independent finance companies.
Availability of assets
There aren’t many assets you can’t acquire through Leasing and Hire Purchase.
Flexibility
A Hire Purchase agreement allows you to own the asset at the end of the contract, with a Finance Lease you rent it for as long as you need it, then return it.
Risks of Leasing and Hire Purchase
Your credit report
Leasing and Hire Purchase providers will conduct credit checks when you apply for finance. Credit checks may affect your credit report.
Charges and fees
Charges and fees may apply at the end of the contract if you wish to secure the asset.
Defaulting
If you default on repayments the asset may be recovered and your credit report may be affected.
94% of Asset Finance applications are successful
British Business Bank Small Business Finance Markets report 2016/17
The different type of leasing options
Finance Lease vs Operating Lease
Finance Lease – You’re responsible for paying for most of the item’s cost over the period of its life, and you’re responsible for maintaining it as if you own it.
Operating Lease – You won’t pay for the full cost of the asset as effectively you’re renting it for a period shorter than the economic life. Therefore, the lease-provider retains the risk and reward of ownership, while you remain responsible for ensuring it remains in good working order during the agreement period.
Need to know / Checklist
- Does Leasing or Hire Purchase work best for you?
- What are the fixed payment?
- How long is the term of your contract?
- What happens at the end of the contract?
- What options exist for a secondary rental period?
Key considerations / eligibility
- Are you getting the best option for your business?
- Can you afford the monthly repayments/rentals or does the contract put too much stress on your working capital?
- Do you have a good credit rating?
- Do you want to own the asset at the end of the contract?
- If you want to keep the asset at the end of the contract, is there a fee involved?
- Are you responsible for your asset's maintenance or is the lease provider?
- Are there tax benefits - Annual Investment Allowance or Capital Allowances - you or the finance provider could make use of when acquiring the asset?
Is Leasing and Hire Purchase right for you?
About your business | ||
| Business stage | Early stage to established with a trading history | |
| Annual turnover | Any | |
| Sectors | Any | |
| Regions | Any | |
What's your next step?
Glossary
Cash positive: If your business is cashflow positive it means your cash inflow is greater than your cash outflow. It’s specific to working capital and the money coming in and out of your company on any given day, rather than profit which indicates money coming in and out over a longer term. Being cash positive doesn’t mean you’re profitable and being profitable doesn’t mean you’re cash positive.
Advanced Rentals: With an Advanced Rental lease agreement, you pay for the upcoming period of use, rather than the one that has just passed. For example, if you have an Advanced Rental lease and pay monthly, you will pay at the start of that month, rather than at the end.
