What is lease-to-own finance?

Big plans and not enough cash… it’s a common problem in business. But one solution provides a way to get the equipment you need immediately while spreading the cost over time, with the option to own it at the end. It’s called lease-to-own finance.

In this article, we’ll explain what lease-to-own finance is, how it works, what it could cost, and whether it could be right for your business.

Key points:

• Lease-to-own finance lets you use equipment immediately while spreading costs over time, with the option to purchase at the end of the agreement

• Monthly payments can be lower than hire-purchase but higher than operating leases, giving you a middle ground between flexibility and ownership

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

What is lease-to-own finance?

Lease-to-own finance is what it sounds like – you lease equipment with the option to own it at the end of the agreement. It’s a flexible way to get the equipment you need without the large upfront cost of buying it outright.

Unlike a traditional lease where you simply return the equipment at the end, lease-to-own gives you a choice:

• Buy the equipment for a predetermined price

• Return it

• Extend the lease for another period (sometimes)

This type of financing usually covers business equipment like manufacturing machinery, office technology, medical equipment, or commercial vehicles.

One key difference from other asset finance options is that you’re not committed to ownership from day one, but you have the flexibility to buy the item at the end if it makes sense for your business.

This flexibility makes lease-to-own particularly attractive for businesses that aren’t sure about what equipment they may need in the long-run.

How does lease-to-own finance work?

The process is fairly straightforward:

1. You start by choosing the equipment you need from a supplier

2. Your chosen financing company buys it on your behalf and immediately leases it to you

3. You receive the equipment straight away and start making monthly repayments

4. At the end of the lease term, you can usually either buy the equipment for a predetermined price (called the ‘residual value’), return it to the financing company, or extend the lease (if the financing company allows)

Throughout the lease term, you use the equipment just like you would if you owned it – although the financing company will technically own it during that period.

So what do your monthly payments typically cover? They’ll usually make up for the equipment’s depreciation, the finance company’s profit margin, and sometimes maintenance costs.

How much does lease-to-own finance cost?

The cost of lease-to-own finance can vary a lot, so it’s important to understand the various factors that can influence it.

Your monthly payments will likely be calculated based on the equipment’s value minus its expected residual value at the end of the lease term. For example, if you’re leasing £50,000 worth of manufacturing equipment over three years with a residual value of £15,000, your monthly payments would cover the £35,000 difference plus interest and fees.

A few things can affect what you pay:

• Your business credit rating: Better credit can often result in better rates

• The type and age of equipment: Newer, high-quality equipment can attract lower rates because it holds its value better

• The lease term: Longer terms generally mean lower monthly payments but potentially higher total costs

• Early purchase option: Some agreements allow you to buy the asset early, potentially saving on interest and fees

Use our business loan calculator to compare lease-to-own costs with traditional financing options and see what works best for your budget.

What are the benefits and risks of lease-to-own finance?

Like all types of financing, lease-to-own comes with both advantages and potential drawbacks that you’ll want to consider.

Benefits of lease-to-own finance

• Preserves working capital: You avoid large upfront costs while keeping cash available for other business needs

• Flexibility at end of the term: Choose to buy, return, or extend based on your business needs at the time

• Easier approval process: Often more accessible than traditional bank loans, especially for newer businesses

• Immediate access to equipment: Get the equipment you need immediately, without waiting to save up the full purchase price

• Predictable monthly costs: Fixed payments make budgeting and cash flow planning easier

• Potential tax benefits: Monthly lease payments may be tax-deductible as business expenses

Risks of lease-to-own finance

• Higher total cost than buying: You’ll typically pay more over time than buying the equipment outright

• No immediate ownership: You don’t build equity in the equipment until you choose to buy it

• Contractual obligations: You’re committed to the full lease term with potential early exit penalties

• Usage restrictions: Some agreements may limit how you can modify or use the equipment

• End-of-term decision pressure: You’ll need to decide quickly whether to buy the asset when the lease expires

If you value flexibility and preserving cash flow, the benefits of lease-to-own finance could outweigh the higher overall costs.

What are the tax implications of lease-to-own finance?

How your tax is treated on lease-to-own finance will depend on how the agreement’s structured and classified by HMRC – particularly whether it’s treated as a finance lease (similar to a hire purchase) or an operating lease.

Generally, you can expect:

• Monthly lease payments: These are usually tax-deductible as business expenses, reducing your taxable profits, especially if the lease is classified as an operating lease.

• Capital allowances: If the arrangement’s classified as a finance lease, you may be able to claim capital allowances on the asset from the start, even before the purchase option is exercised. But if it’s an operating lease, you can’t typically claim capital allowances since you won’t actually own the asset during the lease term.

• Impact of purchase option: Often, lease-to-own agreements include an option to buy the asset outright at the end of the lease. If you exercise this option, and ownership transfers, you may then claim capital allowances on the asset based on the purchase price.

• VAT considerations: VAT is charged on the monthly lease payments but is usually recoverable if your business is VAT-registered, making VAT neutral in most cases.

The amount of tax you’ll pay will depend on how HMRC classifies your lease agreement. They use UK accounting standards to decide if it’s a finance lease or an operating lease, based on who bears the risks and benefits of ownership.

A finance lease often includes:

• Ownership transfer at the end of the lease term

• An option to buy the asset at a low price

• A lease term that covers most of the asset’s useful life

• Lease payments that add up to about the asset’s fair market value

Indicators of a finance lease include transferring ownership by the end of the term, an option to purchase at a significantly reduced price, the lease period covering most of the asset’s economic life, or the present value of lease payments approximating the asset’s fair value.

In a lease-to-own finance setup, similar to a hire purchase, you’re considered the owner for tax purposes and can claim capital allowances immediately. But if it’s more like an operating lease, you can only deduct lease payments as expenses and can’t claim capital allowances unless you become the owner.

Tax is complex, so it’s a good idea to speak with an accountant who can look at your specific lease terms and optimise tax treatment for your business.

Which businesses is lease-to-own finance suited for?

Lease-to-own finance can work well for certain types of businesses and situations.

Startups and growing businesses often find lease-to-own attractive because it provides access to important equipment without impacting cash reserves. If you’re a new business that needs expensive machinery but wants to preserve working capital for marketing, stock, or other unexpected expenses, this flexibility can be really valuable.

SMEs in fast-changing industries can also benefit from the flexibility lease-to-own finance brings. Technology companies, for example, can access the latest equipment without worrying about it becoming obsolete – at the end of the lease term, they can simply return outdated equipment and lease newer models.

Seasonal businesses often appreciate the cash flow benefits. If your revenue fluctuates throughout the year, the predictable monthly payments can be easier to manage than a large upfront purchase. The option to return equipment if your needs change also reduces long-term risk.

Businesses that need to test equipment before committing to ownership may also find lease-to-own finance helpful. You can evaluate how well the equipment serves your needs without the pressure of having to buy it upfront. If it works well, you can buy it later. And if not, you can return it at the end of the term and try something else.

Companies with uncertain growth trajectories can also benefit from this flexibility. If you’re not sure whether you’ll need the equipment in three to five years, lease-to-own finance lets you delay that decision until you have more clarity about where you’re going.

How does lease-to-own compare to other financing options?

Lease-to-own can be a smart choice for businesses that want to preserve working capital. It sits in the middle ground of business finance – more expensive than pure leasing but more flexible than purchase-focused options.

Here’s how it compares to other options:

• Finance lease: Finance leases often have lower monthly payments but no purchase option. Lease-to-own offers more flexibility but typically costs more monthly

• Hire purchase: Hire purchase commits you to ownership from the start with higher monthly payments. Lease-to-own offers flexibility but may cost more if you ultimately purchase

• Business loan: Traditional business loans let you own equipment immediately and often have lower total costs, but require larger upfront payments and have stricter approval criteria

• Operating lease: Operating leases typically have the lowest monthly payments but offer no ownership option. Lease-to-own costs more monthly but gives you the choice to purchase

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FAQs

Is lease-to-own more cost-effective than a bank loan or outright purchase for my business?

It depends on your situation. Lease-to-own typically costs more than buying outright but preserves your cash flow and offers flexibility. If you need to keep working capital available for other opportunities or aren’t sure about long-term equipment needs, the extra cost could be worthwhile.

What happens if my business circumstances change and I can’t continue the payments?

Most lease-to-own agreements include provisions for financial difficulties, but this will vary by provider. You might be able to negotiate reduced payments, extend the term, or return the equipment early (though this usually involves penalties). Early termination is typically more expensive than with hire purchase because you can’t simply sell the equipment to pay off the balance.

How quickly can I get the equipment I need and what’s the approval process like?

Lease-to-own finance is usually a lot faster than a bank loan. Some providers can give same-day decisions for straightforward applications, and some equipment can often be delivered within a week of approval.

How do I account for lease-to-own agreements in our financial statements and what’s the tax treatment?

The accounting treatment depends on how the agreement’s structured. Generally, monthly lease payments are tax-deductible business expenses, but you won’t be able to claim capital allowances until you buy the equipment. The agreement will likely appear on your balance sheet as both an asset and liability, but speak with your accountant for specific advice as treatment can vary based on agreement terms and HMRC classification.

What are the specific terms and conditions I need to negotiate to protect the company’s interests?

The main terms to focus on include the purchase price at the end of the lease, early termination options and penalties, maintenance responsibilities, usage restrictions, and what happens if the equipment breaks down. Make sure the residual value is realistic and that you have clear options at the end of the lease term. And try to negotiate flexibility around upgrades or modifications if your business needs might change.

How will this financing method affect our debt-to-equity ratios and other financial metrics?

Lease-to-own agreements typically appear on your balance sheet as both an asset and liability, similar to finance leases. This will increase both sides of your balance sheet and affect ratios like debt-to-equity. But the impact isn’t usually as significant as traditional loans because you’re not committed to the full purchase price upfront. The monthly payments flow through your profit and loss account as operating expenses.

Can I qualify for lease-to-own finance with limited trading history or poor credit?

Lease-to-own finance is often more accessible than traditional bank lending. Many providers work with businesses that have been trading for just 6-12 months, and some consider newer businesses too. Credit history matters, but the equipment acts as security which reduces the lender’s risk.

Are there flexible terms that allow me to upgrade equipment or adjust payments as my business grows?

Some lease-to-own agreements include upgrade options that allow you to return current equipment and lease newer models before the term ends. Payment flexibility will vary by provider – some offer seasonal payment structures or the ability to adjust terms if your business circumstances change in a major way. Try to negotiate these options upfront as they’re harder to add later.

How does lease-to-own help preserve my working capital compared to other financing options?

Lease-to-own typically requires small upfront costs (often just first payment plus a small deposit) compared to the 10-20% deposits for hire purchase or 100% for outright purchase. Monthly payments are usually lower than hire purchase but higher than operating leases, meaning you keep more cash available for stock, marketing, unexpected expenses, or growth opportunities while still being able to use the equipment.

What types of equipment qualify for lease-to-own?

Most business equipment qualifies, including manufacturing machinery, IT equipment, medical devices, commercial vehicles, office furniture, and specialised tools. The equipment usually needs to have good residual value and be from a reputable manufacturer. Very specialised or quickly depreciating equipment might be harder to finance. Check with providers as each has different criteria and preferred equipment types.

Can I pay off the lease early?

Most lease-to-own agreements include early purchase options, allowing you to buy the equipment before the lease term ends. This could save money compared to completing the full lease term, but you’ll need to pay the remaining residual value plus any early termination fees. The exact terms vary by provider, so make sure you understand the early purchase calculation method and any associated costs.

What’s the difference between lease-to-own and hire purchase?

The main difference is commitment. With hire purchase, you’re committed to ownership from day one and make payments toward the full purchase price. Lease-to-own gives you flexibility – you can choose to buy, return, or extend at the end. Monthly payments are typically lower with lease-to-own since you’re not paying toward the full value, but hire purchase can often work out cheaper if you definitely want to own the equipment.

How does lease-to-own affect my business credit score?

Like other business finance agreements, lease-to-own can positively or negatively impact your credit score depending on payment history. If you make payments on time, this can help build your business credit profile, but missed payments can damage it.

What happens at the end of the lease term?

You’ll typically have three options: purchase the equipment for the predetermined residual value, return it to the finance company, or extend the lease (if available). You’ll usually need to make this decision 30-90 days before the lease expires. If you choose to purchase, you might be able to finance the residual value separately if paying the lump sum would strain your cash flow.

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.