At NBS Financing Broker EST, we recognize that acquiring key business assets is a major commitment for many companies. How these acquisitions are funded requires careful planning. Instead of paying for assets outright in cash, many businesses find it more efficient to spread the cost over time, aligning the payments with the revenue generated by the business. The most common methods of medium-term finance for capital assets are hire purchase and leasing.
Both leasing and hire purchase are financial arrangements that allow a business to utilize essential assets over a fixed period in return for regular payments. The business selects the equipment it requires, and the finance company purchases it on the business’s behalf. Many types of assets are suitable for leasing or hire purchase, including:
- Plant and machinery
- Restaurant & kitchen equipment
- Business cars
- Commercial vehicles
- Agricultural equipment
- Hotel equipment
- Medical and dental equipment
- Computers and software
- Office equipment
Hire Purchase
With a hire purchase agreement, the business becomes the owner of the equipment after completing all the payments. Ownership transfers automatically or upon payment of an “option to purchase” fee. For tax purposes, the business is treated as the owner from the start of the agreement, meaning it can claim capital allowances. Capital allowances are a significant tax incentive for businesses investing in new equipment or upgrading their systems. Under a hire purchase agreement, the business is usually responsible for maintaining the equipment.
Leasing
Leasing allows businesses to use assets without ever taking ownership. In this arrangement, the leasing company claims capital allowances and passes some of the benefit on to the business in the form of reduced rental charges. The business can typically claim the depreciation and deduct the interest from taxable income as a trading expense. The responsibility for maintaining the equipment usually lies with the business customer.
There are several types of leasing arrangements:
Finance Leasing
A finance lease, or “full payout lease,” is similar to hire purchase. The leasing company recovers the full cost of the equipment plus charges over the lease period. While the business doesn’t own the asset, it bears the risks and rewards of ownership, including maintenance and insurance. The leased asset is shown on the company’s balance sheet as a capital item. At the end of the lease, the business may enter a secondary lease period with significantly reduced payments or sell the asset on behalf of the leasing company, retaining most of the proceeds.
Operating Leasing
If your business requires equipment for a shorter term, operating leasing may be the solution. The leasing company retains ownership of the equipment and expects to sell or re-lease it at the end of the lease period. Therefore, the lease rentals are lower since the leasing company doesn’t need to recover the full cost of the asset. This type of leasing is common for assets with established second-hand markets, such as cars or construction equipment. The lease period typically ranges from two to three years, though it can be longer. Assets under operating leases are not shown on the balance sheet, and the full leasing cost is recorded as an expense in the profit and loss account.
At NBS Financing Broker EST, we’re here to help you determine the best financial solution for acquiring the essential assets your business needs, whether through hire purchase or leasing. Let us guide you in making the right choice to support your long-term success.