How a hire purchase agreement can help your business
Hire purchase is a method of funding key pieces of equipment for your business. You pay in instalments and avoid compromising your available working capital. Ownership of the asset can transfer to you once all instalments have been paid, but you are responsible for maintenance and insurance throughout.
Assets commonly bought via hire purchase include vehicles and larger pieces of equipment that are expensive but essential for a business to operate. Hire purchase agreements can last for up to 10 years in some cases, but the term generally relates to the asset’s useful working life.
They allow you to spread the cost of significant assets, whilst benefitting from their use to fulfil your own customer contracts. So how does commercial hire purchase work?
Typically, you put down a deposit of 10% and pay the total amount of VAT upfront. Once your application is accepted, the lender purchases the asset and sets up a pre-agreed instalment plan with fixed terms.
At the end of the contract you have the option to transfer ownership of the asset, but it may appear on your balance sheet from the outset. If you choose to take ownership, you make what is known as a ‘balloon’ payment at the end of the term. It may be possible to lower your monthly repayments by agreeing to increase this final payment.
What type of businesses use hire purchase?
Manufacturing, construction, transport, and engineering, are just some of the industries commonly using hire purchase. It is a suitable form of finance for growing and established businesses that need expensive equipment to trade effectively.
If the asset is likely to depreciate slowly, hire purchase can be a good finance option. You also need to consider how long you need the asset – if it is for a relatively short term there may be more suitable funding options.
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Interest may be offset against profits for tax purposes
Flexibility can be built in for seasonal businesses
Fixed repayments enable better budgeting
Cash flow is optimised
Your business has full use of the asset which can be wholly owned at the end of the agreement
Finance is secured against the asset so there is less focus on trading history and credit rating
Having looked at the benefits, are there any potential disadvantages to using hire purchase? The fact that the contract is fixed means that if your business declines and you can no longer afford the repayments, you may need to forfeit the asset. Additionally, you are paying more overall via hire purchase than the actual cash value.
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