Principal advantages and disadvantages

Hire purchase and leasing can provide considerable benefits to businesses, but they are not necessarily suitable for every business or for every purchase. There are a number of considerations to be made:

Certainty

A hire purchase or leasing agreement is a medium term facility, which cannot be withdrawn, provided the payments are made. The uncertainty that may be associated with facilities such as overdrafts, which are repayable on demand, is removed. However, both hire purchase and leasing agreements are long term commitments and it may not be possible, or could prove costly, to terminate them early.

Budgeting

The regular nature of the payments and their usually fixed amount helps a business to forecast cash flow. The business is able to compare the payments with the expected revenue and profits generated by the use of the asset. If, however, you wish to alter the payment frequency or amount, this will have to be agreed in advance with the finance company.

Fixed Rate Finance

In most cases the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be. This can be beneficial in times of low, stable or rising interest rates but may appear expensive if interest rates are falling. On some agreements, such as those for a longer term, the finance company may offer the option of variable rate agreements. In such cases, rentals or instalments will vary with current interest rates; hence it may be more difficult to budget for the level of payment.

The Effect Of Security

Under both hire purchase and leasing, the finance company retains legal ownership of the equipment, at least until the end of the agreement. This normally gives the finance company better security than lenders of other types of loan or overdraft facilities. The finance company may therefore be able to offer better terms.

The decision to provide finance to a small or medium sized business depends on that business' credit standing and potential. Because the finance company has security in the equipment, it could tip the balance in favour of a positive credit decision.

Maximum Finance Hire purchase and leasing could provide finance for the entire cost of the equipment. There may however, be a need to put down a deposit for hire purchase or to make one or more payments in advance under a lease. It may be possible for the business to 'trade-in' other assets which they own, as a means of raising the deposit.

Use of Resources

If small and medium sized businesses wish to rely on a mix of finance, hire purchase and leasing can extend the range of facilities available and give them access to medium term finance. It is, however, important to weigh up the interest and other costs of the different forms of finance available, against the benefits provided.

Tax Advantages

Hire purchase and leasing give the business the choice of how to take advantage of capital allowances. If the business is profitable, it can claim its own capital allowances through hire purchase or outright purchase. If it is not in a tax paying position or pays corporation tax at the small companies rate, then a lease could be more beneficial to the business. The leasing company will claim the capital allowances and pass the benefits on to the business by way of reduced rentals.