If you need a van, a machine or a kitchen full of equipment, you have three options: pay cash, buy it over time, or rent it. The second and third look similar on a quote and behave very differently in your accounts.
Hire purchase: you are buying it
You pay a deposit, then instalments, and at the end you own the asset outright. It generally goes on your balance sheet, you can normally claim capital allowances on it, and only the interest element is a deductible cost. It suits equipment with a long useful life that you intend to keep.
Leasing: you are renting it
You never own it. The rentals are generally deductible as a business expense, and at the end you hand it back or re-lease. The monthly figure is lower — but that is because you are not paying for the residual value you never receive.
This is why comparing the monthly figures alone tells you almost nothing. The lease is cheaper each month precisely because you end up with nothing. Whether that is good or bad depends entirely on the asset.
Which suits which asset
Hire purchase for things you will run into the ground: a van you will keep eight years, machinery with a long life. Leasing for anything that dates quickly or that you replace on a cycle — laptops, phones, some vehicles — where obsolescence is a bigger risk than cost.
The tax and accounting treatment differs enough that the cheaper headline rate is frequently not the cheaper deal. Put both options in front of whoever prepares your accounts before you sign, because the decision is effectively irreversible once the agreement starts.
Common questions
Which is better for cash flow?
Leasing, in the short term, because the monthly payment is lower for the same asset — you are only funding the part of the value you will use rather than the whole thing. Over the full life it is usually more expensive if you would have kept the asset anyway, because you pay again to replace it. The honest answer depends on whether you actually want to own the thing at the end.
Can I claim capital allowances?
Generally yes on hire purchase, because you are treated as buying the asset, and generally no on an operating lease, because you are renting and the rentals are deducted as an expense instead. Which is better depends on your profit level and what other capital spending you have that year, so it is a question for your accountant rather than the finance provider trying to sell you one of them.
What happens at the end of the term?
Under hire purchase you own the asset, usually after a small option-to-purchase fee. Under a lease you hand it back, extend, or sometimes buy it at a price set at the outset. If there is a balloon payment involved, find out now whether it is optional or compulsory, and what happens if the asset is worth less than the balloon when you get there.