Asset finance vs hire purchase: What’s the difference?

Explaining the difference between asset finance and hire purchase

Businesses rarely have the liquid cash to buy high-value assets outright. So financing is a popular option to get the equipment you need without harming your cash flow.

But not all finance agreements work in the same way. Some give you access to assets with room to upgrade or return them while others are built to give you full ownership at the end.

Understanding the difference between asset finance and hire purchase is key to making the right call for business equipment and infrastructure purchases. So let’s look at how each one works, what makes them different and which is the best fit for your business.

What is asset finance?

Asset finance explained

Asset finance lets you acquire essential business assets or replace aging equipment without making a large upfront payment.

Instead, you spread the cost into smaller, more manageable monthly payments, often with a fixed interest rate.

That way, you can grow your business more quickly while still retaining the funds you need to cover day-to-day operations, emergencies and other growth projects.

This more relaxed approach to getting the assets you need also makes asset finance good for small businesses.

There are a few different types of asset finance. Common options include:

• Finance lease: The lender buys the asset you want and leases it to you. You’re responsible for insuring and maintaining it. At the end of your lease term, you can continue renting the asset, return it or facilitate a sale on behalf of the lender to make a bit of extra cash

• Operating lease: You get to use the asset for an agreed period, with the possibility of upgrading to a more advanced model during that time. Unlike a finance lease, the lender is responsible for maintaining the asset for the length of your agreement

• Contract hire: Typically used to lease vehicles for commercial fleets. While sourcing and funding each vehicle yourself takes a lot of time, under a contract hire agreement the lender does this on your behalf. That way, you can build and start operating your fleet quickly and more affordably

How does asset finance work?

Once you decide which asset you want to finance, you get in touch with a suitable lender – usually through an independent asset finance broker like Kane Financial Services.

You then submit an application with details of your company, the asset and expected costs, along with other documents you need to apply for financing.

The lender reviews your application and decides whether to offer you an asset finance agreement. That agreement sets out:

• Your deposit (usually 10-20%)
• Your repayment amount
• Contract length (usually 12-60 months)
• Interest rate
• Fees
• The end-of-term outcome

Once you sign, the lender will either buy the asset from the supplier or release the funds you need to make the purchase.

You can then use the asset while making your agreed monthly repayments. You can even request that the amount you repay changes throughout the year to support seasonal business needs.

The asset often acts as security for the lender, which is why asset finance can be easier to access than unsecured borrowing.

But because the lender has interest in the asset, you often need to keep it insured and maintained.

Your responsibilities will be outlined in your asset finance agreement.

What is asset finance used for?

Asset finance is great for getting business assets that require a significant upfront investment. This lets you avoid the hidden costs of delaying equipment upgrades that come with waiting to raise working capital for an outright purchase.

However, it can also be useful for acquiring assets that you never want to own, such as those that depreciate or become outdated quickly.

Businesses often use asset finance to purchase:

• Transport equipment: Vans, HGVs, trailers
• Catering equipment: Commercial ovens, refrigeration units, extraction systems
• Gym and leisure: Cardio machines, weight systems, fitness rigs
• Health and beauty: Laser machines, treatment beds, salon equipment
• Education equipment: Interactive whiteboards, classroom IT, training simulators
• CCTV and security: Cameras, access control systems, alarm panels
• Office equipment: Photocopiers, desks, telecom systems
• IT equipment: Servers, laptops, networking hardware

Pros and cons of asset finance

The advantages of asset finance include:

• You spread high costs over time, making them more manageable
• You retain working capital for daily operations and other expenses
• You can access much higher quality equipment versus purchasing
• Some agreements allow upgrades or replacements during the term
• Lenders can bundle multiple assets into one agreement for convenience
• Repayment terms can match how your business generates income
• Certain types offer tax efficiencies that make assets more affordable

But the drawbacks of asset finance consist of:

• With interest, you’ll end up paying more than the retail price for the asset
• Early settlement often carries an additional charge you’ll need to cover
• Interest rates are higher for riskier applications with weaker credit history
• There could be restrictions on how or where you can use your equipment

Asset finance tax considerations

Some types of asset finance are treated as a purchase for tax purposes. That means you might be able to claim capital allowances, including Annual Investment Allowance (AIA), to offset the cost of the asset against your taxable profits.

Other assets are treated as rental arrangements, so you won’t be able to claim capital allowances. But even in these cases, you can usually continue deducting monthly repayments and interest costs as business expenses. So you can still receive the tax benefits of asset finance.

What is hire purchase?

Hire purchase explained

Business owners and managers often think of asset finance and hire purchase differently.

But hire purchase is actually a type of asset finance.

Like other options, it lets you finance assets in regular instalments without paying the full amount upfront.

But unlike leasing, you typically become the full owner of the financed asset at the end of your agreement.

How does hire purchase work?

Similar to other asset finance options, you choose an asset, find a lender, enter into an agreement and make fixed monthly payments with interest over a specified period. The lender buys the asset and hires it out to you, and you’re responsible for maintenance.

The difference is that, at the end of the agreement, you pay a small final fee (often just £1) and the asset becomes yours.

So not only do you receive a tangible return on your investment, but you can also plan for how you want to use that asset in the long term.

What is hire purchase used for?

Since you end up owning the asset, hire purchase is best for high-cost equipment and vehicles with a long lifespan that retain strong value.

This could include:

• Aviation vehicles: Helicopters, light aircraft, avionics systems
• Marine vessels: Sailing yachts, motor cruisers, rigid inflatable boats
• Industrial equipment: CNC machines, presses, production lines
• Agricultural equipment: Tractors, combine harvesters, balers
• Construction equipment: Excavators, loaders, generators
• Transport equipment: Vans, HGVs, trailers
• Catering equipment: Commercial ovens, refrigeration units, extraction systems
• Laundry equipment: Industrial washers, dryers, finishing equipment

Pros and cons of hire purchase

The advantages of hire purchase include:

• Higher approval rates make it accessible to a wide range of businesses
• Agreements are quicker to arrange, especially for standard assets
• Fixed monthly repayments provide certainty over ongoing costs
• Ownership at the end of your term allows you to retain value
• Initial costs are often cheaper, helping to boost cash flow for growing businesses
• There are often fewer restrictions on sector, location and business size
• You avoid ongoing rental or renewal costs once you contract term ends

But the drawbacks of hire purchase consist of:

• Failed credit checks can impact your ability to secure future financing
• Poorly selected assets can lose value faster than you pay them off
• You commit to owning the asset even if your business needs change
• It’s very difficult to upgrade or replace the asset during your agreement

Hire purchase tax considerations

Even though you pay for the asset over time, hire purchase is usually treated as an outright purchase for tax purposes.

That means you can claim capital allowances and AIA on the full cost of the asset in the year you acquire it.

Interest is also tax deductible.

Asset finance vs hire purchase: Which is better?

When is asset finance better than hire purchase?

Asset finance is a better choice when you don’t want to own the asset.

That makes it a good fit for assets that depreciate or become outdated and need replacing quickly, such as IT systems, gym equipment or fleets of transport vehicles.

It’s also a strong choice when you want to acquire multiple different assets under a single contract, such as when outfitting an office or equipping a new site.

When is hire purchase better than asset finance?

Hire purchase is often best for financing assets you want to own and use in the long term.

It suits equipment that holds value or remains essential to your operation, including construction machinery, agricultural equipment, or marine and aviation vehicles.

And since you become the full owner at the end of your contract, hire purchase makes it easier to plan for the long-term success of your business.

Connect with a specialist lender through Kane Financial Services

Whether hire purchase or another asset finance structure best suits your needs, the process starts with finding the right lender.

Off-the-shelf contracts from generic high street lenders often carry higher rates and stricter terms. That’s because they lack sector-specific knowledge and connections, limiting their options and increasing risk.

But with Kane Financial Services as your independent asset finance broker, you can connect with a lender who specialises in your industry. That means you can access high-quality equipment at the right price with a contract that reflects your real business needs.

Contact us today to discuss your options and get a free no-obligation quote for asset finance in Northern Ireland and the UK.