What’s the best way to finance business asset purchases? 

Finance, News,

At some point in most businesses, there will come a time when you need to invest in new equipment or perhaps a company vehicle. With so many financing options to choose from though, how do you decide which one of them is right for your business and your current circumstances? 

Let’s look at three of the most popular choices, being leasing, contract hire, and hire purchase.

1. Leasing

Leasing means renting an asset (such as machinery, vehicle or computer) from a finance company for a set period. When the lease term ends, you usually return the asset, although sometimes there is an option to buy it.

Short-term rentals where the payments cover 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 the 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’s yours.

The good and the bad of leasing…

Here’s why leases can be good:

  • Better cashflow: Low upfront costs and spread-out payments help keep cash in your bank account.
  • Stay updated: It’s easy to upgrade to newer equipment or vehicles.

Less positive characteristics:

  • No ownership: You don’t own ever own the asset.
  • Higher long-term cost: Over many years, leasing can be more expensive than buying.

2. Contract Hire

Contract hire is often used for vehicles. Contract hire is like leasing, but usually includes maintenance and servicing in the monthly payments.

The good and the bad of contract hire…

Here’s why contract hire can be good:

  • Fixed costs: You’ll know exactly what you’ll pay each month, including upkeep.
  • Cash flow friendly: Like leasing, it spreads out the cost.

Less positive characteristics:

  • Mileage limits on vehicles: Exceeding agreed mileage can cost you extra.
  • No ownership: You can’t keep or modify the vehicle.

3. Hire Purchase

With hire purchase, you buy the asset over time. You make a deposit and then regular payments. Once all payments are made, you own the asset.

The good and the bad of hire purchase…

Here’s why hire purchase can be good:

  • At the end of the contract, the asset is yours.
  • Predictable payments: Fixed monthly payments make budgeting easier.

Less positive characteristics:

  • Bigger upfront cost: Requires a higher initial deposit compared to leasing.
  • Maintenance responsibility: You’re responsible for upkeep and repairs.
  • Cash flow impact: Higher monthly payments can strain cash flow.

Making the decision

To choose the best option for you, you may want to consider the following points:

  1. Cash flow: How much can you afford each month? Leasing and contract hire usually have lower monthly payments.
  2. How long you’ll use it: If you need the asset short-term or it becomes outdated quickly, leasing or contract hire might be best.
  3. Ownership needs: If owning the asset is crucial, hire purchase is the way to go.
  4. Financial impact: Leasing keeps liabilities off your balance sheet, while hire purchase adds both an asset and a liability.

In Conclusion

Choosing how to finance your new asset doesn’t have to be complicated. By considering your cash flow, how long you’ll need the asset, and whether ownership matters, you can pick the best option for you.

One final point:

Tax can also be a factor in the decision.

Once you’ve considered the points above, we’d always recommend checking with us before you make any big decisions, to ensure there won’t be any shocks later!

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