PURO Finance - Hire purchase or leasing – how to choose the form of financing for investments?

Hire purchase or leasing – how to choose the form of financing for investments?

New production equipment to be acquired, machinery to be renewed, company cars to be bought for the sales crew... An essential part of an entrepreneur's everyday life is to make purchases and investments, whether it is for growing the business or when facing a surprising situation such as broken gear or tools. Before emptying your pockets, it is always a good idea to put some thought into what financing options the company has for making an investment. Alternatively, you can rely on a financing partner that supports your company’s growth. An ideal financing partner is able to take into account your company's current financials and recommend the best financing solution for your situation.

In this blog post, we present some of the most common financing options for financing fixed company assets. The most suitable method of financing always depends on the specific situation, so there is no one-size-fits-all solution. For example, you may have the option of financing the investment from the company's own cash, applying for an external loan or financing for the investment, making a hire purchase contract, or perhaps financing through leasing. In addition to costs of the financing, the forms of financing differ particularly in terms of the use of collateral and the share of self-financing, that is the rate of investment that the company needs to fund instantly from their own pocket.

Is it worth making an investment from the company’s own cash reserve?

Traditionally, it is thought that the cheapest way to finance an investment is from the company’s own cash reserve. And this is often the case, especially if opportunity costs or possible other investment opportunities and their expected returns are not taken into account. The idea that money from one’s own cashier is free, is partly true. However, when considering purchasing fixed assets, it is also good to take into account what else could be done with the same amount of investment. The expected return on the same investment amount, for example for business growth and development, is often higher than the cost of financing for fixed asset purchases.

If you need expert advice on whether it would be worthwhile for your company to invest from your own cash reserve or perhaps with the help of an external financing partner, get in touch and we will share our expert’s views on your situation.

Many entrepreneurs have considered leasing as a form of financing when investing in machinery and equipment.

Leasing is often a favorable option for the entrepreneur.

Is the company's cash reserve sufficient to make the investment?

In a situation where the company's expected cash flow would enable the investment to be made from your own pocket, but the money lies on the receivables account, invoice financing may be the most flexible and affordable option for securing the investment. Contact us for more information!

Invoice financing, as well as leasing, does not demand any collateral, thus saving your collateral for any future larger financing needs. Therefore, when considering external financing, it is advisable to keep an eye on long-term plans, targets and potential risks, so that the company's collateral can also cover future investment needs.

When making an investment decision, it is a good idea to look to the future and not lock the company's collateral in working capital acquisitions

Leasing or perhaps hire purchase, two different forms of financing in comparison

Leasing is a form of financing in which the subject matter of the financing acts as collateral, allowing the firm to use the company's own funds and collateral for the core business without burdening its liquidity. Leasing's two main types are operating leasing and financial leasing. In operating leasing, the company leases the leasing item directly from the equipment supplier, while in financial leasing, the financing service provider purchases the item from the supplier and leases it to the company. In both cases, the leasing object remains owned by the equipment supplier or the financial service provider and therefore does not appear on the balance sheet of the company acquiring the item, but of the holding company.

The exact content and length of the leasing contract may vary depending on the situation. At PURO, the leasing contract is designed to suit your company, which helps with budgeting and estimating return expectations. In leasing, only a service fee is paid for the equipment for an agreed period, thus avoiding heavy one-time investments and ownership risks. Payments are evenly distributed over the contract period, which also facilitates budgeting and predictability of the company's financial situation. As additional needs arise, it is also easy to add new purchases to the contract as needed. In the event of damage or injury, the leasing partner will support the company even on a fast schedule. In many contract forms, it is also possible to obtain savings in operational costs, for example in the form of an additional maintenance contract.

As mentioned earlier, one of the features of leasing is that the service agreement between the company and the leasing provider does not burden the company’s own balance sheet. Neither does it put a lot of pressure on financial management costs, and the service charge resulting from the leasing agreement can be deducted in taxes. The most common disadvantage of leasing is its easy availability, which, if misused, can lead to over-indebtedness or even the bankruptcy of a company.

One of the biggest benefits of leasing is the inclusion of possible additional services in the contract, such as regular maintenance, which makes the entrepreneur’s life easier

Or perhaps hire purchase?

The alternative to leasing is hire purchase that differs from leasing in that the objective of the contract is to eventually redeem the fixed asset or assets to the company. In hire purchase, a self-financing rate of some degree is usually required, and the portion of the instalments after the self-financing part is transferred to be financed in accordance with the depreciation plan. The length of the payment period usually affects the pricing of the contract.

Ownership of the assets is transferred when the acquisition has been paid in full, in which case the company can, for example, sell or pass on the right to hold the assets when there is no longer a need for it. Unlike leasing, hire purchase is reflected in the company's own balance sheet. Investing in fixed assets with hire purchase is usually a cheaper option than leasing, especially if it is known that the service life of the equipment or machinery to be purchased will be long. In the case of leasing, on the other hand, the risk of ownership or, for example, resale does not remain with the company when the time comes to upgrade the equipment or machinery. One of the biggest benefits of leasing is the inclusion of possible additional services in the contract, such as regular maintenance, which makes the entrepreneur’s life easier as he or she does not need to worry about regular nor unexpected service costs.

Hire purchase differs from leasing in the sense that the eventual objective is to redeem the asset into the company's ownership.

PURO experts will be there for you when you are looking for a financing partner for your investment. We help you to choose the right format of financing for your business and plan the content and length of your contract to meet your specific needs.