Hire purchase (HP) or leasing is a type of asset finance that allows firms or individuals to possess and control an asset during an agreed term, while paying rent or instalments covering depreciation of the asset, and interest to cover capital cost.
Assets are defined as anything of monetary value that is owned by a firm or an individual. Assets listed on a firm’s balance sheet can include tangible items such as inventories, equipment and real estate, as well as intangible items such as property rights or goodwill.
Leases differ from term lending in that the lessee does not have ownership rights to the asset. At the end of the lease contract, the lessee usually has a choice of extending the lease, returning the asset, or introducing a buyer for the asset. Some leasers are entitled to a refund of 95% of the sale proceeds when they introduce a buyer. The refund amount will depend on the contract between the original leaser and lessee.
HP is a financing solution suitable for businesses wishing to purchase assets without paying the full value immediately. The customer pays an initial deposit, with the remainder of the balance and interest paid over a period of time. On completion, ownership of the asset transfers to the customer.
It is important to note that the accounting and tax treatment of leases varies according to the type of lease it is. For example, as a finance lease is accounted for as a loan funding the asset, the tax treatment follows the legal form of the transaction which is the hiring of an asset. More specifically, the treatment of capital allowances differs, and tax treatment should be taken into consideration when deciding how to finance an asset purchase.
The use of HP or leasing is particularly common in industries where expensive machinery is required, such as construction, manufacturing, plant hire, printing, road freight, transport, engineering and professional services.
It is also used to finance other capital requirements of a business, for example:
The asset provider usually dictates this type of linked finance.
There are two main costs that need to be considered:
An HP or leasing facility can normally take up to a week to complete, depending on the size and complexity of the deal.
The right finance for your business section of the site gives examples of financial structures that are suitable for different trading types and sizes of business.
HP or leasing is a medium- to long-term solution to support the use of an asset for a certain period of time. An alternative is a bank loan, which allows firms to purchase an asset and have immediate ownership of it.