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.

In this article, we’ll help you make that decision with confidence, backed by the latest market data.

Key points:

• Leasing lets you use assets with lower monthly payments, minimal upfront costs and no ownership responsibilities

• Financing (buying with a loan or hire purchase) involves higher monthly payments but you’ll own the asset at the end of the term

• Funding Options can help when optimisation working capital isn’t enough, offering access to business finance up to £20 million

Market context

The UK asset finance market is booming right now. And that’s great news for your business.

In 2024, asset finance reached a record £39.7 billion in new business. That represents 40% of all business lending in the UK.

Asset finance has a 96% approval rate compared to just 44% for traditional bank loans. So if you’ve been turned down for a traditional bank loan, asset finance could be your answer.

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?

With financing, you own the asset at the end. With leasing, you don’t.

It’s essentially the difference between taking out a commercial mortgage on a property or renting it. With one, you own the property after several years. With the other, you create a new rental agreement once the first has ended, or you move.

Here's how the two compare:

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

You may also find there’s 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: 

Vehicles:

• Vans and lorries

• Company cars and fleets

• Minibuses

• Even boats and planes

Equipment and machinery:

• Manufacturing machinery

• Construction equipment

• Agricultural machinery

• Printing presses

• Kitchen equipment

Technology:

• IT equipment and software

• Computers and servers

• Printers and copiers

• Office furniture

Property:

• Commercial buildings

• Industrial premises

Business financing options 

If you decide financing is right for you, here are your main options:

• Hire purchase (HP): Spread the cost over time. You usually pay a deposit upfront, then monthly payments until you own the asset outright.

• Hire purchase with a balloon payment: Similar to standard hire purchase, but with lower monthly payments and a large final payment at the end to take ownership.

• Commercial mortgage: This is for property purchases. You pay a deposit, then spread the cost over 3-30 years with interest.

Business leasing options

Leases also come in several different flavours:

• Operating lease: The simplest option. You pay monthly to use the asset. At the end, you hand it back.

• Contract hire: Usually refers to vehicle leasing. Same principle as an operating lease.

• Finance lease: You pay monthly throughout the term, with an option to buy at the end. It’s like a finance lease but with more flexibility.

The pros and cons of leasing and financing

Like other serious financial decisions you make, you’ll want to carefully think about the cons as well as the pros when choosing which option to go for.

Leasing pros and cons

✓ Lower monthly costs: Monthly payments are generally lower than financing since you’re only paying for depreciation plus the lender’s profit.

✓ Easier budgeting: Fixed monthly payments make cash flow planning simpler. And that can help with working capital management.

✓ Limited liability: You don’t have to worry about the asset losing value or finding a buyer when you’re done with it. Many lease providers even handle repairs.

✓ Easy approval: With that 96% approval rate, leasing is often easier to get than traditional financing.

✗ You don't own anything at the end: You’ll keep paying monthly fees forever if you want to keep using it, and you won’t be able to sell the asset to raise cash later.

✗ Restrictions: You might not be able to modify equipment even if it would help your business. There could be mileage limits on vehicles or usage restrictions on machinery.

✗ Early termination costs: Early termination can be expensive. Unlike with financing, you can't just sell the asset to pay off what you owe.

Financing pros and cons

✓ Cash flow friendly: You still spread the cost, which avoids a big upfront hit to your cash flow.

✓ Flexibility: Once you own it, you can modify, sell or use the asset however you want. Many lenders even let you settle early if your circumstances change.

✓ It’s yours: Ownership means you can sell the asset for working capital later. You could use it as security for other loans. And you're free to adapt it as your business grows.

✗ Higher costs overall: You're paying for the full value plus interest. And if the asset loses value faster than expected, you could end up owing more than it's worth.

✗ Maintenance is your responsibility: If something breaks, you pay to fix it. Loan terms are often longer than lease terms too.

Is leasing or financing more suitable for your business?

Since asset finance has a 96% approval rate, both options are likely to be available to your business. So, which is most suitable for your situation? Answer these questions to find out:

Do you want to own the asset at the end?

If yes, financing is your only real option. If you’re not interested in ownership and just want to use the asset, leasing could work well.

How long will you need the asset?

If you need it for the long term (e.g. over 5 years), financing might work out cheaper overall. But if you just need an asset in the short term, leasing could make more sense.

How quickly might the asset become outdated?

For fast-changing technology like IT equipment, leasing allows you to stay current. Assets that don’t change much (e.g. property or some machinery), financing could be better value.

Can you afford higher monthly payments?

If cash flow’s tight, the lower monthly payments of a lease could be handy. But if you can cope with higher payments and want to build equity, financing could work well.

Do you want to modify or customise the asset?

If you need to adapt equipment for your specific business needs, you’ll want to own it through financing since leasing can limit modifications.

Who do you want handling maintenance?

A lot of lease agreements include maintenance and repairs. So if you’d rather not deal with that hassle, leasing could be an attractive option. If you’re happy managing it yourself (and potentially saving money), financing could work well.

How important is your working capital?

If keeping cash aside for other opportunities is important, leasing’s lower upfront costs could help. But if you’ve got strong cash flow and want to add assets to your balance sheet, financing can support that.

Will you want to use the asset as security later?

If you think you might want to use the asset as collateral for other loans in future, you’ll need to own it through financing.

How predictable is your business?

If your needs might change quickly, leasing can offer you more flexibility to switch or upgrade. If business is more stable, the commitment of financing might not worry you.

Here's how it breaks down:

To compare costs and see what works for your budget, use the Funding Options by Tide Asset Finance Calculator.

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Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

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FAQs

Why are asset finance approval rates so much higher than bank loans?

Asset finance is secured against the equipment itself, which reduces the lender's risk. That makes them more willing to lend to a wider range of businesses.

Can I switch from leasing to buying mid-term?

This will depend on your agreement. Some finance leases include purchase options, but operating leases usually don’t. You’ll often need to pay a penalty fee to switch mid-term.

How quickly can I get approved?

Asset finance can often be approved within 24-48 hours, and you’ll typically receive the funds within a week. Traditional bank loans are usually approved within seven days, with funds accessible within another week.

Which is better for cash flow?

Since leasing usually has lower monthly payments and smaller deposits, it’s generally better for maintaining working capital. But financing might be cheaper overall if you plan on using the asset for several years.

How do they affect my accounts?

Operating leases and finance leases (including hire purchase agreements) appear on your balance sheet as both an asset and a liability from day one. The main difference is in how the expenses are recognised in your profit and loss account - operating lease payments are typically recorded as a single lease expense, while finance leases and hire purchase agreements separate the interest and depreciation charges.

What about tax?

For most operating leases (e.g. contract hire), lease payments are usually fully tax-deductible as a business expense, although there may be restrictions for vehicles with higher CO2 emissions. If you finance or purchase an asset outright, you can’t deduct depreciation directly. But you could claim capital allowances instead, which provide tax relief for the asset’s cost over time. The best option depends on your business and the type of asset, so it’s wise to consult an accountant for specific advice.

Do I need a big deposit?

Leasing typically needs smaller deposits (often 1-3 months of payments). Hire purchase usually required 10-20% of the asset value.

What if I can’t pay?

With leasing, your provider could repossess the asset. With financing, you might be able to sell it to pay off the balance, depending on its value.

Can new businesses get asset finance?

Usually. Even businesses with no employees get approved 53% of the time. There are plenty of lenders that specialise in helping newer businesses.

What paperwork will I need?

You’ll usually need to provide business accounts, bank statements, ID and details about what you want to finance. The exact requirements will vary depending on the provider and amount you want to borrow.

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.