As an SME owner, your fleet is an important part of your organisation. Therefore, it is crucial that you understand the difference between leasing a vehicular asset over hire purchasing the same asset. Let’s look at the differences and how they could impact your business.
The first districting between hire purchase and leasing agreements surrounds the legal end of the contract. In HP circumstances, the business becomes the legal owner of the asset. However, in the leasing situation, the asset is returned to the company that originally leased the asset.
What Are The Similarities?
In both cases, in terms of the agreements, they both involve the company paying a fixed sum during a pre-defined period. Most car HP or lease agreements are periodically fixed at a monthly charge period. The agreement will be set for a definitive period with legal caveats in place in lease agreements whereby if regulatory changes occur the car will be replaced in line with the law.
In terms of the relationship around lease agreements, the car or van as an asset does not belong to the company (or as in legal parlance ‘the lessee’). You legally have sole use of the car or van but even though you are making monthly payments to the ‘lessor’ – or even at the end of the contractual term – the car does not belong to you.
In relation to hire purchase agreements, you would pay a monthly payment to a company much like a lease agreement, and you would have legal sole use of the vehicle, but you would have the option for full ownership at the end of the agreement period. In essence, Hire Purchase is like a rent-to-own scheme. This is what makes it markedly different from leasing. Because with leasing you are borrowing an asset but with HP you are purchasing an asset.
Depreciation Consequences – The Difference Between Hire Purchase and Leasing
One key issue worth noting surrounds the depreciation issue that surrounds the two different ways of financing fleet purchases within SMEs. In simple terms, if you lease a vehicle, the depreciation will not show on your business’s financial accounts. However, the Hire Purchase route will add a depreciatory asset onto your business balance sheet.
Servicing – The Differences?
This is another major difference because under a Hire Purchase agreement your company is liable for the entire servicing of the vehicle. It is in all intents and purposes your vehicle. However, under lease agreements, any servicing or maintenance remains to the liability of the company who leases the vehicles to your organisation. This is the major difference in terms of maintenance and servicing your fleet in both circumstances.
Which Is Best For Your Business?
At the end of the day, the biggest difference surrounds the notion of flexibility. Leasing offers businesses the greatest scope for flexibility and therein scalability. You can be more fluid with your own assets with a limited budgetary expense. Put more simply, you can lease an asset for the period of its greatest usefulness (when it’s new and needs the least maintenance) to expand your business but can then return the asset once it depreciates without incurring any business balance sheet costs.
Why not call Prestige Business Management today? We can help discuss the differences between HP and leasing for your fleet or any other business need. We can help you understand the depreciatory and flexibility issues around both leasing and hire purchase. Why not call us today on 0203 773 2927 to talk to us directly?