When it comes to financing options for acquiring assets, two common methods are financial lease and hire purchase. While both involve acquiring an asset for a fixed period of time in exchange for periodic payments, there are key differences between the two.
Ownership:
In a financial lease, the lessor (the financing company) retains ownership of the asset throughout the lease term. This means that the lessee does not have the option to own the asset at the end of the lease period unless a separate agreement is reached. On the other hand, in a hire purchase agreement, the buyer takes ownership of the asset once all payments have been made. This gives the buyer more control over the asset and the ability to use it as collateral or sell it if needed.
Depreciation:
In a financial lease, the lessor typically claims the depreciation of the asset on their books, as they are the legal owner. This can have tax implications for the lessor, as they may be able to deduct the depreciation expense from their taxable income. However, in a hire purchase, the buyer is responsible for claiming depreciation on the asset. This means that the buyer can benefit from any tax deductions associated with depreciation, which can help offset the cost of acquiring the asset.
End of Term Options:
At the end of a financial lease term, the lessee usually has the option to either return the asset, purchase it at fair market value, or extend the lease. This provides flexibility for the lessee, allowing them to adapt to changing business needs or market conditions. In contrast, in a hire purchase agreement, once all payments have been made, the buyer automatically owns the asset. This can be advantageous for buyers who are looking for long-term ownership and stability.
Understanding the nuances between a financial lease and hire purchase is crucial for businesses when deciding on the most suitable financing option for acquiring assets. Both methods have their own advantages and considerations, and consulting with a financial advisor can help businesses make informed decisions based on their specific needs and financial circumstances.
