In this guide we explain how each one works, the key differences between them, and the questions worth asking before you decide. If you haven’t already read our introduction to asset finance, that’s a good starting point before this one.
How Hire Purchase Works
Hire Purchase is Typically Suited to Businesses That:
- Want to own the asset outright at the end of the agreement
- Are financing long-life assets such as machinery, plant, or commercial vehicles.
- Want to take advantage of capital allowances, as hire purchase assets can qualify for the Annual Investment Allowance in many cases.
- Prefer fixed, predictable monthly payments
How a Finance Lease Works
With a finance lease, the lender purchases the asset and leases it to your business for an agreed term. You make regular rental payments throughout and have full use of the asset, but — unlike hire purchase — the finance company retains ownership of the asset at all times.
At the end of the primary lease term, you typically have a few options depending on the agreement: you may be able to continue leasing the asset at a reduced secondary rental, return it to the lender, or in some cases sell it on the lender’s behalf and retain a share of the proceeds.
A Finance Lease is Typically Suited to Businesses That:
- Do not need to own the asset outright
- Want to keep the asset of their balance sheet
- Are financing assets that may need replacing or upgrading after a few years
- Want potentially lower monthly payments compared to hire purchase on the same asset
Hire Purchase vs Finance Lease: key differences at a glance
The UK’s Finance & Leasing Association (FLA) represents the asset finance industry and provides useful guidance on the types of facilities available to businesses.
Which One Should Your Business Choose?
There is no single right answer — it depends on your business’s priorities, tax position, and the nature of the asset being financed. A business that wants to build equity in its assets and benefit from capital allowances will often prefer hire purchase. A business that prioritises flexibility, lower monthly costs, or keeping assets off its balance sheet may find a finance lease more suitable.
It’s also worth noting that your accountant’s advice matters here. The tax and accounting treatment of hire purchase versus finance lease can differ, and the right structure from a financing perspective may not always align with what’s most efficient from a tax perspective. Always take professional advice before committing to a structure.
What About Other Types of Asset Finance?
Hire purchase and finance lease are the most common, but they aren’t the only options. Operating leases, sale and HP back, and refinancing arrangements all have their place depending on the situation. As an independent broker, Percy Finance can discuss the full range of options available and match your business to the most appropriate structure across our whole panel of lenders.
Other Finance Solutions Percy Finance Can Arrange
Hire purchase and finance lease are just two of the many funding solutions Percy Finance can arrange for your business. Whether you need finance for a specific asset, want to release capital from equipment you already own, or are looking for funding that isn’t tied to a physical asset at all, we work across the whole market to find the right solution. Our team regularly arranges the following for businesses across the UK: