Cash purchase vs hire purchase — and why the savings can exceed the repayment from day one
A commercial solar installation is a capital asset — and like most capital assets, it does not need to be funded entirely from working capital. Finance arrangements are available that allow businesses to install a system with a minimal or zero upfront payment, spreading the cost over time while benefiting from the electricity savings from day one.
The two principal options are cash purchase and hire purchase. Understanding the difference matters, because they have different implications for cash flow, tax treatment and long-term return.
The business pays the full installation cost from its own resources. The asset is owned outright from the date of installation, and all savings and export income flow directly to the bottom line from day one.
| Item | Industrial 50 kWp example |
|---|---|
| Net installation cost (ex-VAT) | £43,750 |
| Annual Investment Allowance (25%) | −£10,938 |
| Effective net cost after tax relief | £32,812 |
| Annual financial benefit | £10,604 |
| Simple payback | ~3.1 years |
| Estimated 20-year net benefit | £179,000+ |
The business finances the installation through a hire purchase arrangement, typically over 7 years. Monthly repayments are made to the finance provider. Crucially, under hire purchase the business owns the asset from day one — which means the full purchase price qualifies for the Annual Investment Allowance in year one, exactly as with a cash purchase.
The key question is whether the annual electricity saving exceeds the annual repayment — making the system effectively self-funding from the moment it is switched on.
| Item | Industrial 50 kWp example |
|---|---|
| Installation cost (ex-VAT) | £43,750 |
| Indicative monthly HP repayment (7yr, ~9.5% APR) | £842/month |
| Annual repayment | £10,104 |
| Annual solar saving and export income | £10,604 |
| Net annual surplus during finance period | +£500/yr |
| AIA corporation tax relief (year one, 25%) | +£10,938 |
| From year 8: annual benefit (finance complete) | £10,604/yr |
The finance case for commercial solar has strengthened significantly at current electricity prices. At 27.7p/kWh — compared to the 23p figure used in many older analyses — the annual saving from a 50 kWp system is approximately £2,700 per year higher than it was in 2023. The repayment on a 7-year hire purchase has not changed materially. The result is that the monthly surplus position has improved from marginally negative to modestly positive for a well-matched system.
The right choice depends on your business's specific circumstances:
Power Purchase Agreements (PPAs) and operating leases are available in the commercial solar market, though they are more common for larger systems (100 kWp+). Under a PPA the installer owns the panels and sells the electricity to the business at a discounted rate. While this eliminates capital outlay entirely, it also means the business does not own the asset, cannot claim the AIA, and pays for the electricity rather than receiving it free. For most SME commercial properties, cash purchase or hire purchase offers the better long-term financial outcome.
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