Guide
Is leasing or buying plant equipment on finance better?
When you want to get additional plant machinery for your business, there are two main types of plant machinery finance you'll most likely consider. Whether it's an excavator, telehandler, forklift or something else you need, you'll probably be looking at leasing and hire purchase.
Words by: Auto Trader
Published on 8 August 2018 | 0 min read
Hire purchase
Hire purchase is often referred to as 'buying on finance' - it means paying in instalments rather than outright. Similar to many kinds of consumer finance, it's a good way to spread the cost of a large purchase over time, so you can keep working capital available for other business expenses.
Advantages
If you're looking at adding plant machinery to your business, chances are you'll also have costs like purchasing raw materials or taking on temporary staff for the next job. In these cases, hire purchase can be a good way to buy the equipment you need while keeping cash flow stable.
When you get plant machinery using hire purchase, you'll own the item at the end of the contract, and normally your monthly payment is a fixed amount for the whole contract. This means you've got a predictable payment every month, and gradually pay for the plant while you're using it.
When you get plant machinery using hire purchase, you'll own the item at the end of the contract, and normally your monthly payment is a fixed amount for the whole contract. This means you've got a predictable payment every month, and gradually pay for the plant while you're using it.
Disadvantages
This might sound obvious, but buying plant using hire purchase is more expensive than paying cash to purchase it outright. However, many firms find it a worthwhile cost in return for spreading out the amount over 12 months or more.
You'll normally have to pay a deposit and the VAT up front, so although it'll be a lower amount than purchasing in cash, you still need a certain amount of cash available to get plant on a hire purchase agreement. Hire purchase is also not a very flexible form of finance, so if your business's situation changes regularly it might be worth considering leasing for the extra flexibility - rather than risk being stuck with an asset you won't need for the long-term.
You'll normally have to pay a deposit and the VAT up front, so although it'll be a lower amount than purchasing in cash, you still need a certain amount of cash available to get plant on a hire purchase agreement. Hire purchase is also not a very flexible form of finance, so if your business's situation changes regularly it might be worth considering leasing for the extra flexibility - rather than risk being stuck with an asset you won't need for the long-term.
Summary
- Buy plant in instalments
- Spread the cost over time
- Manageable monthly payment
- Deposit and VAT required up front
- Not very flexible form of finance
- Cheaper than leasing long-term
Leasing
Plant leasing, on the other hand, is a long term rental agreement. In other words, you pay monthly for full use of the plant. When the lease comes to an end, you'll either give back the equipment or start a new lease. There are many firms offering short-term plant rentals, and it's possible to hire plant by the day if your equipment needs are very short-term. In these cases, providers will normally refer to 'plant hire' rather than 'plant leasing'.
Advantages
The main advantage of plant hire and equipment leasing is flexibility. It's easy to adjust your inventory to suit your business's needs with leasing, so you can add more equipment when you're busy and give it back when you're not.
Related to this point is that leasing contracts tend to be fairly short, for example one or two years, which means leasing is less of a commitment than purchasing equipment outright.
Related to this point is that leasing contracts tend to be fairly short, for example one or two years, which means leasing is less of a commitment than purchasing equipment outright.
Disadvantages
The main disadvantage of leasing is that over the long term, it's the most expensive way to get plant machinery. In other words, if you're going to use the plant for a long time, it probably makes sense to own it rather than rent it. Every business's situation is different though, so this isn't necessarily a hard-and-fast rule.
Along similar lines, because you never own the asset, the lender may place restrictions on how you can use the asset. For example, they might specify a mileage restriction, or stop you from making modifications to the item - depending on what you want the plant for, this might be a deal breaker.
Along similar lines, because you never own the asset, the lender may place restrictions on how you can use the asset. For example, they might specify a mileage restriction, or stop you from making modifications to the item - depending on what you want the plant for, this might be a deal breaker.
Summary
- Most flexible way to access plant machinery
- Upgrade to suit business requirements
- You don't own the plant
- More expensive in the long term
- Lease contract may come with restrictions on mileage or modification
Tax
One other thing worth considering is the tax implication of choosing leasing or hire purchase to acquire plant machinery. While it might not make a big difference for one asset, it could be a significant factor if your business needs a lot of plant machinery. It all comes down to how it appears on your balance sheet. When you lease plant machinery, it is accounted as an operating cost, which is offset against profit and may reduce your corporation tax.
Hire purchase, on the other hand, is accounted as an asset from day one, because it's a purchase via instalments. If all things are equal, this means your operating costs will be lower, and you'll have more assets on your balance sheet.
Hire purchase, on the other hand, is accounted as an asset from day one, because it's a purchase via instalments. If all things are equal, this means your operating costs will be lower, and you'll have more assets on your balance sheet.
Conclusion
Leasing and hire purchase give you lots of things to consider. For some firms, it will make sense to lease plant machinery so you've got the flexibility to add equipment or upgrade. For others, the best course of action will be to invest in plant machinery long term via hire purchase.
Overall, it makes sense to consider what the future looks like for your business. If you're confident you'll need the plant for a long time, and the technology isn't likely to move on much, you'll probably want to own it outright. But if you're not sure, leasing is a great way to get what you need with the option to change it or upgrade it in the near future. Whichever you choose, our plant machinery finance partner Funding Options can help you find the right plant finance for your firm.
Overall, it makes sense to consider what the future looks like for your business. If you're confident you'll need the plant for a long time, and the technology isn't likely to move on much, you'll probably want to own it outright. But if you're not sure, leasing is a great way to get what you need with the option to change it or upgrade it in the near future. Whichever you choose, our plant machinery finance partner Funding Options can help you find the right plant finance for your firm.