Hire purchase or finance lease: which suits the equipment you need?

Buying equipment on finance is rarely a choice between finance and cash. The real choice is between structures. Hire purchase and finance lease both spread the cost of an asset over time, but they differ on who owns it, how VAT is handled and what happens at the end. Knowing the difference before you sign helps you pick the one that fits the business.

Hire purchase: you are working towards ownership

With hire purchase, you pay an agreed amount each month and the asset becomes yours once the final payment is made, often alongside a small option-to-purchase fee. Until then the lender owns it. Hire purchase tends to suit equipment with a long working life that you intend to keep, such as machinery, plant or commercial vehicles. Your accountant can advise on how it is treated for tax.

Finance lease: you pay to use it

With a finance lease, the lender owns the asset throughout and you pay rentals for the right to use it over a fixed primary period. You do not own it at the end. Instead you can usually continue leasing for a secondary period at a much lower rental, sell it as the lender's agent and share the proceeds, or hand it back. Leasing can suit kit that loses value quickly or becomes outdated, where you would rather not carry the risk of what it is worth later. VAT is commonly charged on the rentals rather than up front, which can help cash flow, though the treatment depends on your circumstances.

How to compare them

Ignore the monthly payment on its own. Look at the total you will pay over the whole agreement, any deposit or advance rentals, and the cost of the end-of-term option. Ask what happens if you want to settle early, and whether there are charges for excess usage or damage. A cheaper monthly figure can simply reflect a longer term or a larger final payment.

What lenders look at

Lenders consider the asset, including its value and how easily it could be resold, and the business behind it: trading history, accounts and the ability to meet the repayments. Asset finance can cover up to 90% of the asset value, so a deposit is often part of the picture, but the right structure and amount depend on the case.

Which suits you

If you plan to keep the equipment for most of its life, hire purchase is often the natural fit. If you expect to upgrade regularly, or want to keep your options open, a lease may suit better. A broker can compare the structures side by side for your asset and your accounts.