Q&A - Why is leasing and hire purchase a source of finance?

Leasing is another word for renting assets (e.g. property) over a period of time.  Leasing is a way of financing the use of such assets without actually having to buy them outright.

There are two main ways a business can pay for the resources and equipment it needs:

• Buy it outright (often referred to as “capital expenditure”)
• Hire purchase or lease

Buying outright is a good option if a business has the funds available, or if it is essential that it owns the equipment. However, paying for resources and equipment means an up-front outflow of cash.  This might not be the best option for cash flow.

Paying for goods on hire purchase or leasing equipment allows a business to:

• Use an asset over a fixed period in return for regular payments (i.e. the cash outflow is spread over a longer period)
• Lets the business choose the equipment it needs, with the finance company buying it on behalf of the business

In return, the business is usually responsible for the maintenance of the asset.

How does the cash flow and finance element of leasing work?

If you lease the asset, a finance company buys the equipment on behalf of the business and the business pays for the asset in regular instalments over a fixed period of time. These smaller payments will leave the business with more cash, but because it is charged interest on the instalments, the business actually pays more for the goods overall.

Revision Presentation - Improving Cash Flow [17 May 2012]
Revision Quiz - Cash Flow Forecasting for a Startup [12 May 2012]
The Business of Football - Everton explain where the money goes [16 Jan 2012]
Profits dive and put pressure on liquidity - the Distress Monitor [29 Sep 2011]
Cash flow crisis at Saab: what went wrong? [23 Jun 2011]
Business investment: the UK corporate cash pile [15 Jun 2011]
Lesson Worksheet - Cash Flow Management Basics [5 May 2011]
Marketing meets Sources of Finance! [20 Mar 2011]
Toffees in a Sticky Situation [17 Feb 2011]
The end of the line for JJB? [13 Feb 2011]
Cash flow and trade credit - putting the squeeze on suppliers [3 Feb 2011]
Q&A - How is the current ratio calculated and interpreted? [8 Jan 2011]
Q&A - What is the “creditor days” ratio? [8 Jan 2011]
Q&A - How can the debtor days ratio be calculated and interpreted? [8 Jan 2011]
Q&A - How is stock turnover calculated and interpreted? [8 Jan 2011]
Q&A - What factors determine the amount of working capital in a business? [7 Jan 2011]
Q&A - What is “working capital”? [7 Jan 2011]
BUSS1 Revision Quiz - Sources of Finance for a Startup [13 Dec 2010]
Cash flow problems put Pontins into administration [13 Nov 2010]
Cash flow Clue-doh! The Mystery is Revealed… [2 Nov 2010]
Revision Games - Sources of Finance Definitions [1 Nov 2010]
Cash flow continues to trouble small businesses [25 Aug 2010]
Cashflow-Cluedoh! [10 Aug 2010]
Tesco sells some stores - a good example of a sale and leaseback [28 Jul 2010]
BUSS4 data - what happened to business investment in the UK recession? [14 Jun 2010]
25 Ways to Get The Startup Right [22 Apr 2010]
Cash flow problems persist after the recession [15 Apr 2010]
Recession Survival Strategies Cost UK SMEs £16bn [31 Mar 2010]
Global technology giants are hoarding their cash [26 Mar 2010]
Starter Activity - Cash Flow Forecasting for Celebs [25 Mar 2010]
Strategy in a recession - Don’t Panic Mr Mainwaring! [25 Feb 2010]
Cash management becomes a strategic priority during the recent recession [22 Feb 2010]
UK companies conserve cash in the recession - bad news for shareholders? [8 Feb 2010]
Revision Presentation - Profit and Cash [30 Jan 2010]
Source of finance - SMEs turn to the private alternatives to banks [27 Jan 2010]
Excel AS Teaching Resource: Cash Flow Forecast [16 Jan 2010]
Q&A - Is there an optimal level of gearing? [5 Jan 2010]
Cash flow problems and the business of dying [3 Dec 2009]
Managing Cash Flow - Beware the Economic Recovery [26 Oct 2009]
A Day in the Life - Cash Flow Forecasting [9 Sep 2009]
Workforce planning - getting ready for swine flu [16 Jul 2009]
Small businesses waiting for the upturn [29 Jun 2009]
How not to run a business - the Gordon Ramsay way [31 May 2009]
Q&A - Why are start-ups vulnerable to cash flow problems? [26 May 2009]
Why businesses fail - an interview with Pepita Diamand [24 May 2009]
Q&A - Why are trade creditors a source of finance? [1 May 2009]
Cash flow management - chasing the late payers [22 Apr 2009]
Small businesses in the middle of the crunch - insights for students [22 Apr 2009]
Football finances under the spotlight [5 Apr 2009]
Q&A - What is the difference between long-term, medium-term and short-term finance? [1 Apr 2009]
Q&A - What is cash flow? [1 Apr 2009]
Credit Insurance and Retailer Cash Flow [6 Mar 2009]
Cash flow management - dividends in the spotlight [6 Mar 2009]
Update on how 10 small businesses are weathering recession [20 Feb 2009]
More flak for the banks from business customers - what have they done with bail-out cash? [18 Feb 2009]
Businesses counting the cost of the snow [3 Feb 2009]
In a recession - cash is King! [30 Dec 2008]
Small businesses call for cap on credit card costs to ease finance squeeze [30 Dec 2008]
Teaching cash flow management with Cash Flow Clue-Doh! [19 Dec 2008]
Revision Quiz - Improving Cash Flow [26 Oct 2008]
Proposals to help firms with cash flow [19 Oct 2008]
Cash is king for small businesses in the downturn [1 Aug 2008]
SMEs should stand up to the large business bullies [26 Jul 2008]
Cash flow problems could mean its a wrap… [26 Jul 2008]
Credit crunch gets personal for small business owners [2 Apr 2008]
Woolies slashes dividend to conserve cash [2 Apr 2008]
Late payment is strangling the cash flow of small businesses [3 Mar 2008]

BUSINESS TEACHER RESOURCE NEWSLETTER
Get first news of business teaching resources, ideas and other materials from tutor2u. Over 9,400 business teachers from the UK and around the world receive our regular teacher email newsletters. Sign up for free here!