How to decide between leasing and financing business assets

New light commercial vehicle registrations in Britain grew by over 20% in 2023, with battery electric van registrations going up by a similar amount. If you’re looking to expand your fleet, upgrade your vans, or invest in other business assets, you might be wondering whether you should finance or lease those business assets. Here’s how to make that decision. 

What’s the difference between financing and leasing? 

Both financing and leasing include monthly payments. Both provide the use of a vehicle or asset, and both can preserve cash flow by avoiding a large upfront cost. So, what’s the difference between these two types of asset arrangements? 

The main difference is that at the end of a financing arrangement, you own the asset, whereas once a leasing term has ended, you don't own the asset. Either the asset is returned to the lender, or you take out another leasing arrangement to maintain use of the asset, or you lease a new asset under a new arrangement.

As an illustration, it’s essentially the difference between taking out a commercial mortgage on a property or renting the same property. With one, you own the property after 3-30 years. With the other, you create a new rental agreement once the first has ended, or you move. Beyond that, here are some other differences you may encounter: 

• Monthly payments are usually higher with financing than with leasing, since you’re paying for the full value plus interest and fees 

• Financing arrangements are usually longer than leasing arrangements 

• You may find there is more flexibility in a financing arrangement than with a lease. Leases often come with restrictions around mileage, wear and tear, and modifications. This is because, ultimately, the lender owns the item and wants to retain the value 

What assets can I lease or finance? 

Before we dive into which option is better for your business, here are the types of assets we’re talking about when referring to financing vs leasing: 

• Vans 

• Lorries

• Boats

• Planes 

• Company cars 

• Vehicle fleets 

• Equipment 

• Printing presses 

• Software 

• Manufacturing machinery 

• Construction equipment 

• Agricultural machinery 

• Tractors and harvesters 

• Computers 

• Printers and copiers  

• Office furniture 

• Chef-grade kitchen equipment 

• Property 

Types of business leases 

Leases come in all shapes and sizes. Here are a few of the lease types businesses can leverage.  

Operating lease 

An operating lease enables you to use an asset for a predetermined period of time. You pay for the use each month. At the end of the term, you don't take over ownership. It’s the most straightforward form of equipment leasing. 

Contract hire 

Contract hire is another way to describe an operating lease, but it usually refers to an arrangement where the asset being leased is a vehicle. Business car leasing is another popular way to describe contract hire. 

Finance lease 

With a finance lease, you pay throughout the arrangement but there may be a final payment you can pay if you want to keep the item. Essentially, the lender purchases the asset, you pay monthly to use it, and then there is the option of taking on ownership at the end. But if you’re sure you want ownership, it’s unlikely this would be the right solution for you. 

Pros of leasing

There are several reasons SMEs prefer to leverage leases over financing. Here are some of them. 

Lower monthly costs 

Rather than paying for the entire value of the asset, you only pay for the cost of depreciation plus the lender’s profits. This makes leasing a cheaper option per month when compared to financing. 

Easy budgeting 

Since the monthly payments are clear-cut and upfront, leases can be easy to budget for. This can have the knock on effect of maintaining cash flow and improving working capital management. 

No ownership risk 

Since you don’t own the item, you don’t have to worry about depreciation or reselling. Some lease providers even take care of repairs. 

Accessibility 

Leasing can be easier to get than business financing. This might be a good choice if you can't get approved for asset finance. 

Leasing drawbacks 

For starters, you won’t own the asset at the end of the term. This means you won’t be able to sell it to unlock cash. You won’t be able to keep using it without continuing to pay a monthly fee and you might end up paying more over a longer period of time than if you bought the asset outright. 

Beyond that, there are also often more restrictions over what you can do with the asset than with a financing arrangement. For instance, you might be unable to modify the asset, even if you feel that modification would increase the value. 

Again, think of it like renting. That accent wall might increase the value of the property, but that doesn’t mean the landlord would approve of your paint job. Restrictions can also include things like usage limits, which could impede on the asset’s usefulness and scalability, depending on your business. 

You could get charged for damage, not to mention, terminating the lease early could be expensive. Unfortunately, unlike with financing, with leasing, you can’t just sell the item and pay off the remaining balance to switch mid-term. Again, this could get in the way of the asset’s usefulness.

Types of business finance  

Alternatively, there are several types of business finance options you could opt for if you decide to choose financing.  

Hire purchase 

Hire purchase (HP) enables you to spread the cost of an asset over a predetermined period of time. HP finance usually includes the payment of a deposit at the beginning of the term and once the term is complete, you take over ownership of the asset. 

Hire purchase balloon payment 

This type of finance is similar to standard hire purchasing, but the monthly repayment costs are reduced and there's a large final payment at the end of the term to take over ownership of the asset. 

Commercial mortgage 

A commercial mortgage is a type of business financing. Essentially, you pay a deposit at the beginning of the term. You then spread the cost of the purchase of the property over the course of 3 to 30 years, with the addition of interest and fees. Other property financing types include bridging loans, auction finance, and property development finance. 

Pros of financing 

Financing can be a great option if you’re looking to spread the cost of an asset purchase. Here are some of the pros.  

Preserve cash flow 

Financing enables you to spread the cost of an asset, meaning you can buy an essential business asset without the big upfront hit to cash flow. 

Flexibility  

Many lenders enable you to use your asset as you wish. You’re also often able to get a settlement payment. This means, if you want to sell the item to get a more up-to-date option or because your needs have changed, you can pay the lender an upfront fee to take over ownership of the asset. 

Ownership 

Ownership comes with a lot of responsibility, but it also comes with big benefits. Once you have full ownership, you can sell the asset if you need working capital. You can use it as collateral for another loan and you’re free to modify it as needed, which could make it more scalable long-term. 

Financing drawbacks 

The biggest drawback is that the costs are higher, since you’re paying for the full value of the asset rather than the cost of depreciation. There’s also the risk that by the time you’ve paid off the asset it’s lowered in value more than predicted. You’re responsible for all maintenance and servicing costs and the loan term lengths are usually longer than lease term lengths. 

How to choose between leasing and financing as a business 

Only you can decide which one is right for your business, but here are some questions to ask yourself that may help you decide: 

• Do you want to own the asset? 

• Do you believe this asset has strong long-term value? 

• Can you afford large monthly payments for the next 3 years at a minimum? 

• Do you want to be responsible for maintaining the asset? 

If you answered “yes” to the above questions, you might want to go for business financing. 

• Do you need the latest equipment now to run your business but feel that the same equipment will grow outdated in 5+ years?

• Do you want access to new tools and technologies over the next few years? 

• Do you want to make smaller monthly payments? 

• Are you worried about cash flow?

If you answered “yes” to these, you might prefer to leverage a leasing arrangement. 

Find a lease or loan with Funding Options by Tide

Whether you’ve decided to go for a lease or business financing, we can let you know your options. We work with over 120 lenders, helping facilitate both financing arrangements and leasing agreements. Just submit your details via the link below and we’ll be in touch to let you know if you’re eligible for your chosen form of financing. 

Find a lease or loan.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.