Asset finance in the UK: hire purchase, leasing and what it costs a small business

Asset finance is borrowing secured on the vehicle, machine or equipment you are buying, so the asset itself backs the deal. The three main structures differ mainly in who owns the asset at the end. With hire purchase you end up owning it. With a finance lease you never do, and the lender sells or extends at the end. With an operating lease you rent it for a shorter period and hand it back. The right one depends on how long you will use the asset, what you want to happen to its value, and how the VAT and tax fall for your business.

Key Takeaways

What asset finance pays for

Asset finance spreads the cost of equipment, vehicles and technology across the period you use them, so the payments are funded by the revenue the asset helps produce. Lenders fund a wide range of assets: trucks, trailers, vans, manufacturing machinery, construction equipment, recycling machinery and agricultural equipment, to name those one UK lender lists. Some lenders concentrate on particular sectors. Aldermore, for example, says it specialises in construction and transportation.

It can also fund used assets, and it can release cash from equipment you already own. We come back to that below.

Two differences from other borrowing matter in practice. Asset finance is not repayable on demand, unlike an overdraft, and because it is secured on the asset, lenders apply different criteria from those for an unsecured bank loan. If you are weighing it against other borrowing, our pieces on business overdraft or loan and whether a business loan is worth it cover the other side of that choice.

Hire purchase, finance lease and operating lease side by side

	Hire purchase	Finance lease	Operating lease
Owner at the end	You, once the final payment and any nominal fee are paid	The lender, always	The lender; you return the asset
Typical monthly cost	Highest, because you pay for the whole asset plus interest	Lower than hire purchase	Lower still on many assets
Who carries resale risk	You	You	The lender
Capital allowances	Yes, from when the asset is brought into use	No	No
VAT	Usually upfront on the full price	On each rental	On each rental
Balance sheet	Asset and liability from day one	Asset and liability from day one	Most now on the balance sheet from 2026; short-term and low-value leases are the exception
Suits	Assets you will use for most of their working life	Using an asset for a long time without owning it	Assets you want to upgrade regularly

A few points sit behind that table.

Hire purchase. Legally the finance company owns the asset until you have paid everything, but you can use it freely, including modifying it or taking it abroad. At the end you pay a nominal option fee, often £1, and ownership transfers. Missing payments is what changes that picture: because the asset is the security, the lender can repossess it.

Finance lease. The lessor stays the legal owner throughout. At the end of the primary term you can typically extend at a reduced rent, sell the asset to a third party and take a rebate of part of the proceeds, or buy it at its open market value. Where the lessor sells on your behalf, the rebate is commonly around 95% of the proceeds. The point many borrowers miss is that on a finance lease you carry the risk that the asset is worth less than expected at the end. A lease does not remove that risk in the way people assume.

Operating lease. This is shorter, often one to five years, and the lessor carries the resale risk because it expects to recover a significant part of the asset's value when it is returned. That is why the payments are lower. It suits technology that ages quickly and vehicles with strong residual values, where you would rather hand the thing back than sell it.

Two vehicle-specific variants are worth knowing. Contract hire is used only for vehicles: costs are fixed monthly, based on the vehicle's value, the expected mileage and its estimated future value, and the vehicle goes back at the end. PCP-style agreements add an option to buy the vehicle at the end for an agreed sum. The accounting and tax on both depend on the terms of the agreement, so each needs checking individually.

Deposit, term and balloon on hire purchase

Hire purchase starts with a deposit, followed by fixed monthly instalments covering capital and interest. Terms typically run from 24 to 72 months.

The deposit is where borrowers are often surprised. A deposit of up to 30% of the asset's cost is common, and most of it is VAT, not equity. In that case two thirds of the deposit, or 20% of the asset value, is VAT, and one third, or 10% of the asset value, is the actual payment towards the asset. Some lenders offer established businesses nil-deposit deals, so the figure varies by lender and by how strong the application is.

Here is that worked through on a £30,000 asset, taking the 30% deposit case:

• Deposit: 30% × £30,000 = £9,000
• Of which VAT: 20% × £30,000 = £6,000
• Of which payment towards the asset: 10% × £30,000 = £3,000

If you are VAT-registered, the £6,000 comes back through your next VAT return. It is still cash you have to find first, and it is a real strain on a business that is financing to preserve cash.

Balloon payments

A balloon is a larger final payment agreed upfront so that every other instalment is smaller. It is an option rather than the default on hire purchase, and lenders such as Aldermore build it into their hire purchase as a choice alongside a flexible deposit and fixed or variable payments.

The arithmetic of a balloon deal, using a worked example: a £6,000 deposit, then 34 monthly repayments of £1,000, then a £10,000 final payment, totals £50,000. The balloon takes £10,000 out of the monthly burden. It does nothing to reduce what you owe. It moves a lump sum to the end, and the question is where that £10,000 will come from. Often the business sells the asset to clear it. If the asset sells for less than the balloon, you pay the difference from your own pocket.

Balloons also appear on the lease side, where lower monthly payments can mean a larger final payment, so ask for the end-of-term figure in writing before you sign any structure.

What it costs: flat rate versus APR

Typical pricing is a flat rate of 3% to 8% a year, which is equivalent to roughly 6% to 16% APR. That gap is the thing to understand. A flat rate is charged on the original amount for the whole term, even though you are repaying the balance as you go, so the effective cost is about double the headline.

Worked through on a £20,000 van with a £4,000 deposit, so £16,000 financed over four years:

• An illustrative agreement at 5% interest produces fixed payments of around £368 a month.
• 48 × £368 = £17,664. Against £16,000 borrowed, that is about £1,664 of interest.
• A 5% flat rate on the same £16,000 would be £16,000 × 5% × 4 years = £3,200 of interest, or £19,200 in total, about £400 a month.

Same headline number, roughly double the interest. When you compare quotes, ask for the APR and the total amount payable, not just the rate. Add any option-to-purchase or documentation fees the lender charges, which vary by funder.

Leasing the same van over a similar term would typically cost less per month, because you pay for the value you use rather than the full price. That is not the same as costing less in total. Hire purchase can work out cheaper overall if you will use the asset for most of its working life, because a lease payment includes a charge for the resale risk the lessor carries, on top of interest.

VAT in plain words

Hire purchase is treated as a single supply of goods, so VAT is normally due upfront on the full price. Some lenders will defer that charge. For a VAT-registered business it is recoverable, so the cost is cash-flow timing rather than a permanent cost, but you must fund it until the return is filed.

Leasing is treated as a supply of services, so VAT is charged on each rental, and you recover it in line with your normal VAT position. On a large asset the difference in timing is meaningful. A lease spreads the VAT across the term, while hire purchase puts it all at the start.

Cars have their own rules. On a leased car, most businesses can reclaim 50% of the VAT on the rental where there is any private use, and 100% where the car is used only for business. For cars above 50g/km, 15% of the rental is disallowed for corporation tax, so you can deduct 85% of what you pay. If your fleet includes cars, speak to your accountant before choosing a structure.

Tax and accounting, without the jargon

Hire purchase. For capital allowances, HMRC treats you as the owner from the moment you bring the asset into use. You do not wait for the final payment. Most plant, machinery, tools and equipment qualify for the Annual Investment Allowance, which lets you deduct up to £1 million of qualifying purchases in full in the year you buy them. Taking the allowance on the full cost, while paying the lender over several years, is what makes hire purchase tax-efficient. The interest in the instalments is deductible as well.

Finance lease and operating lease. You cannot claim capital allowances on a leased asset, because you are not the owner for tax purposes. Instead you deduct the rentals against profits as a business expense. For a finance lease, the lessor keeps tax ownership and claims the allowances. The tax treatment of an operating lease follows its accounting treatment.

Balance sheet. Hire purchase puts the asset and the liability on the balance sheet from day one, with depreciation applied each year. For accounting periods beginning on or after 1 January 2026, the updated FRS 102 brings most operating leases onto the balance sheet as a right-of-use asset and a matching lease liability, as finance leases always were. Leases of 12 months or less and low-value leases are likely to stay off. Micro-entities reporting under FRS 105 are not affected.

That matters if you have bank covenants. Keeping a lease off the balance sheet used to be a reason to prefer leasing. For most operating leases that advantage has now narrowed. Check with your accountant what a new lease does to your gearing and covenant headroom before you sign.

The FLA has argued that leasing should be brought into the full expensing regime. As things stand, the first-year allowance logic favours the business that owns the asset for tax purposes, which is the hire purchase customer.

What lenders look at

Lenders mainly assess three things:

• The asset. Its type and age. New or late-model assets in well-understood categories attract better rates, and a commercial vehicle is easier to value than a bespoke machine. Assets need to be fit for purpose and in new or acceptable condition.
• Your ability to pay. Typically assessed from bank statements, alongside current business performance and financial background.
• The director's personal credit history, together with a credit report from the credit reference agencies.

Late or missed payments do not automatically end an application. Aldermore says it still may be able to help and will want to understand why they happened, so explain the history upfront rather than hoping it goes unnoticed.

The status of the business is not a barrier by itself. Aldermore considers sole traders, partnerships, limited liability partnerships and limited companies, and it looks at the strength of the business, your experience and your plans. A new business can often get asset finance from its first month of trading, especially for assets with an established resale market such as commercial vehicles, because the lender's primary security is the asset. Very new businesses may need to provide more information or accept less favourable terms.

Straightforward applications can be approved within 24 to 48 hours, with funds or direct payment to the supplier typically following in two to five working days. To see roughly what you could support before you apply, our borrowing calculator is a reasonable starting point.

Raising cash against assets you already own

You do not have to be buying something new. Asset finance can release equity in equipment you already own. There are two routes:

1. A loan secured on the asset. If you default, the asset reverts to the funder.
2. Sale and leaseback. You sell the asset to a finance provider and lease it back for an agreed monthly sum. This releases capital you can reinvest.

The second route needs care. The leaseback has to be assessed as either an operating or a finance lease, and that assessment drives the accounting, including when the asset leaves the balance sheet and how the new lease liability is recorded. The tax consequences are complex and depend on the terms of the agreement, so take tax advice before completing. Do the sums on cost too: you are paying a funder to hold an asset you used to own outright, and you remain exposed to the rentals for as long as the lease runs.

When it suits, and when it does not

It suits when:

• You will use the asset for most of its working life and want to own it (hire purchase).
• The asset is second-hand. Hire purchase works well for used equipment, whereas leases tend to focus on new equipment.
• You want the capital allowance on a significant purchase, subject to the Annual Investment Allowance limit.
• You upgrade often or want to avoid managing resale value (a lease, particularly an operating lease).

It does not suit when:

• You need working capital rather than one named asset. A business loan gives you cash to use where it is needed.
• You cannot afford the deposit and VAT upfront on a hire purchase.
• You are unsure how long you will need the asset. You are committed for the whole term and cannot normally switch from a finance lease to hire purchase part-way, because the structures and tax treatment differ.
• You are choosing a lease only to keep it off the balance sheet. For most operating leases that no longer works from 2026.

Hire purchase also leaves you with the full ownership burden: maintenance, repairs and depreciation are yours. Leasing companies sometimes offer maintenance or replacement options, which is a genuine advantage if the asset is critical to keep running.

How big the market is

The Finance & Leasing Association (FLA) reports that its members' asset finance providers are on track for record new business in 2025 of almost £41 billion. It says that is a third of UK investment in machinery, equipment and vehicles, and that around a third of high-growth firms use asset finance. For comparison, FLA members provided £29 billion of asset finance in 2015, which was equivalent to almost 32% of UK investment in machinery, equipment and purchased software.

The monthly data is more mixed than the headline:

• September 2025: new business of £3.88 billion, up 11% on the same month a year earlier. SME lending rose 14% and lending to larger firms rose 9%.
• October 2025: total new business up 7% year on year, with SME and larger-business lending each up 8%. Over the first ten months of 2025, new business was 2% higher than a year earlier.
• By sector, October 2025: manufacturing lending up 34%, construction up 8% and services up 3%. Business new car finance rose 7% and plant and machinery 6%, while commercial vehicle finance fell 6%.
• By product, September 2025: operating leasing up 16% and lease/hire purchase up 8%, while finance leasing fell 5% (and 3% across the third quarter).

Two things follow. The record total is built on modest overall growth, 2% across ten months, with some months down. And finance leasing is the one major product category that has been shrinking while operating leasing grows, which fits the 2026 accounting change.

Frequently Asked Questions

Can a new business get asset finance? Often, yes. Because the asset is the main security, a new business can sometimes qualify from its first month of trading, particularly for assets with a strong resale market. Very new businesses may be asked for more information or offered less favourable terms.

Can I claim capital allowances on a leased asset? No. On a finance lease or operating lease the lessor keeps tax ownership, so you deduct the rentals as an expense instead. Capital allowances are a hire purchase benefit, and they start when the asset is brought into use.

Do I pay VAT upfront on hire purchase? Usually, yes, on the full price, though some lenders defer it. If you are VAT-registered you reclaim it, but you have to fund it first. On a lease, VAT is added to each rental instead.

Can I use hire purchase for second-hand equipment? Yes. Hire purchase is a good fit for used assets, and is often more cost-effective for them than leases, which tend to be written on new equipment.

Can I switch from a finance lease to hire purchase part-way through? Usually not, because the structures and the tax treatment are different. Choose the structure you want before you sign.

Deplexifi arranges asset finance for UK businesses, and the useful first step is comparing hire purchase and lease quotes on the same asset side by side. See our UK page for how that works.

Comparing the headline rate and the monthly payment instead of the APR, the total payable, the upfront VAT and what happens to the asset's value at the end.