Q&A - Why is leasing and hire purchase a source of finance?

Leasing is another word for renting assets (e.g. property) over a period of time. Leasing is a way of financing the use of such assets without actually having to buy them outright.

There are two main ways a business can pay for the resources and equipment it needs:

• Buy it outright (often referred to as “capital expenditure”)
• Hire purchase or lease

Buying outright is a good option if a business has the funds available, or if it is essential that it owns the equipment. However, paying for resources and equipment means an up-front outflow of cash. This might not be the best option for cash flow.

Paying for goods on hire purchase or leasing equipment allows a business to:

• Use an asset over a fixed period in return for regular payments (i.e. the cash outflow is spread over a longer period)
• Lets the business choose the equipment it needs, with the finance company buying it on behalf of the business

In return, the business is usually responsible for the maintenance of the asset.

How does the cash flow and finance element of leasing work?

If you lease the asset, a finance company buys the equipment on behalf of the business and the business pays for the asset in regular instalments over a fixed period of time. These smaller payments will leave the business with more cash, but because it is charged interest on the instalments, the business actually pays more for the goods overall.