Asset Finance UK: Hire Purchase, Finance Lease and Equipment Funding Explained

In this article

• Hire purchase: you own the asset at the end of the term, eligible for capital allowances
• Finance lease: lender owns the asset, you make rental payments, options at end of term
• Operating lease: shorter-term rental, lower payments, lender takes residual value risk
• Asset finance is often accessible to businesses with limited trading history
• Rates: typically 3% to 8% flat rate per annum (6% to 16% APR equivalent)

Hire purchase: own the asset at the end

Hire purchase is the most common asset finance structure for UK businesses. You pay a deposit (sometimes zero for established businesses), then make fixed monthly instalments covering capital and interest over an agreed term, typically 24 to 72 months. At the end of the term, on payment of a nominal fee (often £1), legal ownership transfers to you.

Hire purchase is particularly well-suited to assets where long-term ownership makes sense: commercial vehicles, agricultural machinery, manufacturing equipment, medical devices, and similar assets with long productive lives. Because you own the asset at the end, you can use it as security for future borrowing, sell it, or continue using it beyond the finance term.

From a tax perspective, hire purchase allows you to claim capital allowances on the full asset value in the year of purchase, subject to the Annual Investment Allowance limit (currently £1 million per year). This can generate a significant corporation tax deduction in the year the asset is acquired, improving your after-tax cost of the investment.

Finance lease: use without ownership

A finance lease transfers use of the asset to your business without transferring ownership. The finance company (the lessor) remains the legal owner throughout the term, and you (the lessee) make rental payments. At the end of the primary term, you typically have three options: extend the lease at a reduced rent, sell the asset to a third party and receive a rebate of part of the proceeds, or purchase the asset at its open market value.

Finance leases appear on your balance sheet under IFRS 16 and FRS 102. For most SMEs using FRS 102, a right-of-use asset and corresponding lease liability are recognised, which affects your balance sheet ratios. Consult your accountant about the balance sheet treatment before committing to a finance lease if you have financial covenants to maintain.

VAT on finance lease rentals is charged with each payment rather than upfront on the full asset value. This can improve cash flow for VAT-registered businesses compared with hire purchase, where VAT is payable on the full purchase price at the outset (though recoverable as input VAT). For large asset purchases, the difference in VAT timing can be meaningful.

Operating lease: lower payments, more flexibility

An operating lease is a shorter-term arrangement where the finance company retains residual value risk. Because the lessor expects to recover a significant portion of the asset's value through its residual value at the end of the lease, monthly payments are lower than a finance lease on the same asset. This makes operating leases attractive for businesses that want to minimise monthly outgoings or upgrade to newer assets regularly.

Operating leases are commonly used for IT equipment, vehicles with strong residual values, and any asset where technology obsolescence is a concern. At the end of the lease, you simply return the asset and, if needed, take a new lease on updated equipment. You are never left with an aging asset and no trade-in value.

Under FRS 102 and IFRS 16, many operating leases now appear on the balance sheet as right-of-use assets. However, short-term leases (under 12 months) and low-value asset leases may qualify for off-balance-sheet treatment. Your accountant can confirm the correct treatment for your specific lease.

Eligibility and the application process

Asset finance is typically more accessible than unsecured lending because the loan is secured against the asset. Lenders primarily assess: the type and age of the asset (new or late-model assets attract better rates), the business's ability to service the monthly payments (assessed from bank statements), and the director's personal credit history.

New businesses can often access asset finance from their first month of trading, particularly for well-established asset types such as commercial vehicles, where the lender is confident in the asset's value and saleability. Very new businesses may need to provide additional information or accept less favourable terms.

The application process is typically faster than for unsecured loans. Most straightforward asset finance applications are approved within 24 to 48 hours. Spark Finance approaches multiple asset finance lenders simultaneously, presenting competing offers so you can choose based on rate, term, and total cost. Funds (or direct payment to the supplier) typically follow within two to five working days.