Author: Jim Riley Last updated: Sunday 23 September, 2012
Advantages of using leasing & HP as a source of finance
we discussed in our introduction to asset finance, the use of hire purchase
or leasing is a popular method of funding the acquisition of capital assets.
However, these methods are not necessarily suitable for every business or
for every asset purchase. There are a number of considerations to be made,
as described below:
One important advantage is that a hire purchase or leasing agreement is a
medium term funding facility, which cannot be withdrawn, provided the business
makes the payments as they fall due.
The uncertainty that may be associated with alternative funding facilities
such as overdrafts, which are repayable on demand, is removed.
However, it should be borne in mind that both hire purchase and leasing agreements
are long term commitments. It may not be possible, or could prove costly,
to terminate them early.
The regular nature of the hire purchase or lease payments (which are also
usually of fixed amounts as well) 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.
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
installments 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
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
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.
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.
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