The situation usually picks the structure.
Businesses rarely start by choosing between a hire purchase and an operating lease. They start with a problem, which is usually a machine that has to be replaced, a fleet that has aged out, or capital tied up in plant that could be working elsewhere. These four pages start there instead.
Buying plant without using cash
The most common reason a New Zealand business finances anything, and the one where the arithmetic is most often done backwards.
Read onRefreshing a fleet
Replacing several assets at once is not four separate decisions. What the incoming assets cost is decided largely by the equity position across the ones going out.
Read onReplacing an ageing asset
The decision is almost never about age. It is about the point where failures stop being predictable, and the cost of that is downtime rather than the repair bill.
Read onReleasing equity from owned assets
A business that owns its equipment outright has capital sitting still. Two structures can put it back to work, and what the money is for decides whether either of them should.
Read onWhy start here
The situation usually decides more than the comparison does.
A business comparing hire purchase against a finance lease in the abstract will go round in circles, because in the abstract they are both reasonable. The comparison only resolves once the situation is on the table, and the situation is usually one of four.
Something needs buying and the cash would be better used elsewhere. Several assets have aged out together and need replacing as a group. One asset has become unreliable enough that repairs cost more than a replacement would. Or capital is sitting inside assets the business already owns and could be doing more somewhere else.
Each of those points at different structures, and more usefully, each has its own trap. The fleet refresh is decided by the equity position across the outgoing assets rather than by the price of the incoming ones. The replacement decision is decided by downtime rather than by age. Releasing equity is decided by what the capital will actually be used for, because the arrangement costs real money and is only worth it if the money earns more than it costs.
These four pages start from the situation and work toward the structure, which is the direction the decision actually runs.
What these pages do not do
No situation makes a structure automatically right.
It would be easy to write four pages each ending in a recommendation, and it would be misleading. The same situation in two businesses with different cash positions, different tax positions and different intentions for the asset points at different structures, and a page that pretended otherwise would be giving advice rather than information.
What these pages do instead is set out what changes in each situation, which structures are commonly used and why, and what the specific pitfall is. The comparison is left where it belongs, which is with the business and its accountant.
FAQ
Financing decisions, common questions
Is financing better than paying cash?
It depends on what the cash would otherwise do. Paying cash has no interest cost and a real opportunity cost, and financing has an interest cost and leaves the capital available. Where working capital is genuinely constrained, or where the money would earn more inside the business than the facility costs, financing frequently wins. Where cash is idle, it frequently does not.
Should several assets be financed together or separately?
Both are common. One facility across several assets is simpler to administer and ties them together, which can mean a default on one reaches all of them. Separate facilities let each term match the asset behind it, which matters when a trailer outlasts two vehicles. It is worth deciding deliberately rather than by default.
When is an asset too old to keep repairing?
When the repairs have become unpredictable rather than when they have become expensive. A known annual maintenance cost on an old asset is frequently cheaper than a replacement. What changes the arithmetic is unplanned downtime, and the honest number is what a week of stopped work costs the business rather than what the repair bill was.
Does a trade-in count as a deposit?
Commonly yes, where the trade value exceeds the balance owing on the outgoing asset. The surplus becomes the deposit on the replacement, which reduces the amount financed and typically improves the indicative rate. Where the trade does not clear the balance, the shortfall is either paid or rolled into the new agreement.
Is releasing equity from an owned asset expensive?
It costs more than a straightforward purchase facility, because the lender is funding a business need rather than an acquisition and the asset is already used. Whether it is worth it depends entirely on what the released capital does. Funding growth that earns more than the facility costs is sound; funding an operating shortfall is usually treating a symptom.
How many assets can a business finance at once?
There is no fixed number. A new application is assessed against total commitments rather than against the new asset alone, so the constraint is serviceability rather than count. A business with several facilities can find the combined servicing requirement consumes the assessed headroom, which arrives quietly during growth.
Does financing affect the ability to borrow for other purposes?
Yes. Existing facilities are visible to any lender assessing a new application and count toward total commitments, and where a general security agreement exists it can affect what other lenders are willing to take security over. Both are ordinary and both are worth knowing before a facility is added rather than at the point another is needed.
Is it worth financing a small asset?
Frequently not. On small amounts, establishment and documentation fees can outweigh the cash-flow benefit of spreading the cost, and the smallest facilities sometimes fall below what a specialist financier will write at all. Where a purchase can be absorbed without straining working capital, paying for it outright is commonly simpler and cheaper.