Your business might need to acquire assets (like furniture, computer equipment or company vehicles) or capital equipment, such as plant or machinery.
You could buy your assets or equipment outright, or you might decide to rent them instead. This allows you to get the equipment and assets you need that you might otherwise be unable to afford. It can also free up working capital for use in other areas of your business and save you from having to take out a large loan to buy equipment outright.
You may want to lease or rent equipment that has high maintenance costs, can quickly become outdated, or is only used occasionally.
There are three main types of lease agreement – finance leasing, operating leasing and contract hire – and you should carefully consider which one is right for your business.
There are different kinds of lease arrangement. You should consider them all to see which is best suited to your business and the asset that you are acquiring.
Finance leasing is a long-term lease over the expected life of the equipment, usually 3 years or more, after which you pay a nominal rent or can sell or scrap the equipment - the leasing company will not want it any more. Although you don't own the equipment, you're responsible for maintaining and insuring it.
You must show the leased asset on your balance sheet as a capital iteman item that has been bought by the company.
Leases of over 7 years, and in some cases over 5 years, are known as 'long funding leases'. You can claim capital allowances under long funding leases as if you had bought the asset outright.
With operating leasing, the leasing company is responsible for maintenance and insurance, and they will take the asset back at the end of the lease. You don’t have the show the asset on your balance sheet.
Operating licensing is useful if you don’t need the equipment for its entire working life.
With contract hire, the leasing company takes some responsibility for management and maintenance, such as repairs and servicing. You don’t need to show the asset on your balance sheet. Contract hire is often used for company cars.
Leasing is most useful for equipment and assets that you can’t afford to buy.
You may want to buy equipment or assets rather than lease them if you don’t want to enter into a long-term leasing agreement or want to keep your long-term costs down – it's often more expensive to lease equipment or assets than to buy them outright.
The types of companies that offer hire purchase and leasing contracts include: