The van has to be replaced. The one outside has done 140,000 miles, failed its MOT on corrosion, and the quote to put it right is more than it is worth. A new one is £32,000 including VAT. The business has £9,000 in the bank and a VAT bill due in five weeks.
So you look at finance, and three dealers send you three monthly figures that are within about £15 of each other and mean entirely different things.
Hire purchase buys it, a lease rents it
Under hire purchase you pay a deposit, then monthly instalments across a term, and at the end you pay a nominal option-to-purchase fee and the van is yours. Legally you are hiring it until that final payment, which is why the finance company can repossess if you stop paying, but commercially it is a purchase spread out. The asset sits on your balance sheet from day one and you depreciate it.
A finance lease is a rental. You never own the asset. At the end of the primary term you usually either return it, or continue into a secondary period at a peppercorn rental, or sell it as the lessor's agent and keep most of the proceeds as a rebate of rentals. It is a way of having the use of an asset without buying it.
Contract hire, or operating lease, goes further. You pay a fixed monthly rental for an agreed term and mileage, hand the vehicle back at the end, and the lessor carries the residual value risk. Maintenance is often bundled. There is no asset, no disposal, and no argument about what it is worth in three years, which is the whole appeal. The counterweight is the condition report on return and the excess mileage charge, both of which are real money.
None of these is right in general. Hire purchase suits an asset you will run into the ground, which is most working vans. Contract hire suits an asset you want to be somebody else's problem in three years, which is most cars.
The balloon is a decision you are deferring
Hire purchase agreements are commonly written with a balloon payment, sometimes called a guaranteed minimum future value, at the end. It lowers the monthly figure, which is how the three quotes came out so close together, and it leaves you with a lump sum due in year four.
There is nothing wrong with a balloon if you have decided what happens to it. The van is worth more than the balloon, so you settle it and keep the van. Or you refinance the balloon over a further period, at a rate that reflects a five-year-old vehicle rather than a new one. Or you sell and settle.
What goes wrong is arriving at the date with none of those planned, in a month that already has a Corporation Tax payment in it. Diarise the balloon the day you sign, and put the money aside monthly if you intend to settle it.
Note also that a hire purchase or lease agreement to a sole trader or partnership can be a regulated agreement under the Consumer Credit Act 1974 where the credit is £25,000 or less and the borrowing is not wholly for business, which brings a different set of protections and cancellation rights. A limited company gets none of that. Most small business asset finance is unregulated, so the agreement is whatever the agreement says.
Capital allowances and VAT do not treat the two the same
This is where the choice stops being about the monthly figure.
Under hire purchase, you are treated as owning the asset for capital allowances from the moment it is brought into use, so the full capital cost goes into your allowances claim immediately even though you have paid a fraction of it. The Annual Investment Allowance, set permanently at £1m from April 2023, gives 100% relief on qualifying plant and machinery, and vans are plant and machinery. Companies may also have full expensing available on new qualifying plant. The interest element of each instalment is a deductible expense as it is incurred. Rates and thresholds move at fiscal events, so check the position for the year you buy in.
Under a lease, you do not own the asset and you cannot claim capital allowances on it. Instead the rentals are deductible against profits as you pay them, subject to restrictions for cars above a CO2 threshold. Slower relief, spread across the term, which can suit a business with low profits now and higher profits later.
VAT differs too. On hire purchase, the VAT on the full purchase price is charged up front and a VAT-registered business reclaims all of it on the next return, which is a substantial cash inflow in the quarter you buy. On a lease, VAT is charged on each rental and reclaimed as you go, so there is no lump, and for cars there is the standard 50% block on reclaiming VAT on leased cars available for private use. Commercial vehicles with no private use are treated differently again.
If the reason you are financing is that you have no cash, the up-front VAT reclaim on hire purchase is worth real money to you in the quarter it lands.
Add up the total before you sign
Take every quote and work out the same three numbers: the total of all payments including the deposit, the balloon and every fee; what you own at the end; and what the cost is per year of use.
That last one is the honest comparison. A four-year hire purchase on a van you will keep for nine years is a very different cost per year from a three-year contract hire you will repeat forever. The finance is only part of it: insurance, servicing, tyres, the annual test and the fuel are the majority of a commercial vehicle's cost, and a maintenance-inclusive rental can genuinely be cheaper than doing it yourself once you price your own downtime.
Read for the things that are not in the monthly figure. Documentation fees, option-to-purchase fees, early settlement charges and the basis they are calculated on, excess mileage in pence per mile, and the damage matrix on return. Ask what happens if you want to settle in year two, and get the answer in writing.
Then check who you are dealing with. Members of the Finance and Leasing Association sign up to a business code of practice, which is not regulation but is a starting point.
Where this shows up in the game
Business Baron prices capacity in the assets that actually deliver it, so a haulier's limit is lorries and drivers and a builder's is vans and plant. Buying outright uses the cash you needed for wages. Financing preserves it and commits the next four years of monthly outgoings before you know what those years look like. The capital allowance and the VAT reclaim land in the quarter they would really land in, which is often what decides the choice.