Buy or hire, that is the question
Whether to buy outright or opt for contract hire will be a policy decision. In order to get this right you will need to consider the advantages and disadvantages of each. How you view many of the factors involved will depend on how your business works. It can be quite complicated so you may want to look at the table of advantages and disadvantages below;
- You own the truck and can do what you want with it, when you want
- It is an asset that can be shown on your balance sheet
- You may be able to claim capital allowances against any purchase
- You are responsible for all maintenance and repairs
- The asset will depreciate over time
- There will be a large up-front cost, possibly affecting cash flow
- You will have to deal with unexpected costs as they arise and with any associated operational delays. This may involve hiring in replacement equipment
- Reduced flexibility over time
- No capital investment
- Ability to budget for fixed monthly costs with no unexpected repair costs
- Improves cash flow
- No need to worry about the disposal of equipment at the end of the contract, with ability to start new contract with new equipment
- Service and maintenance is the responsibility of the supplier, usually with guaranteed service levels
- Contract will usually include replacement in the event of breakdown, allowing for business continuity
- Can be offset against tax
- May give access to supplier’s fleet management system with enhanced operational data
- Legal compliance and peace of mind (assuming you hire from an FLTA Member company)
- The truck is not owned and so cannot be modified without supplier consent
- Will not be included on balance sheet
- May have to pay for repairs at end of contract – but see section on fair wear and tear
Yes, it is 100% allowable against taxable profits. Importantly, you can claim the full amount of each year’s hire payments. With outright purchase you could only claim capital allowances on a figure that diminishes every year.
Yes… but a depreciating one! Perhaps the single biggest reason for hiring – as opposed to buying – is that you conserve working capital which can usually be used much more effectively in running your business.
Hiring helps with cash-flow and by taking an asset off your balance sheet makes a marked improvement in your ratio of return on capital employed. What’s more, instead of settling for the cheapest compromise when acquiring a truck, you can choose the best model for your needs – because the equipment is paying for itself while you’re using it.
Money invested in depreciating plant involves a loss of interest. This is true whether the cash comes from your own capital funds or borrowed from an outside source. Where money is borrowed, the loss is direct and immediately identifiable. If you employ your own money, you will lose the interest which would have been accrued had the money been invested elsewhere in a more profitable way.
Simply because they are professionals in their business, just as you are in yours. The company supplying the trucks is a specialist operator who knows how to get maximum utilisation from its machines and support services. Most truck users are unable to match this cost-efficiency. Instead of seeing a truck as an overhead, the hirer sees it as a profit earner which transforms it into a productive asset.
The rapid growth in hire when compared to outright purchase would suggest that it is frequently the best option. However, every business is different and the final decision is best taken in conjunction with your own financial experts or advisors.