Hire Purchase

Find out more about hire purchase in our detailed guide

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Every business needs access to finance to thrive and grow. But when you’re looking to invest in bigger ticket items, like equipment, machinery or fleet, it’s not just a question of dipping into the cash reserves.

Choosing the right type of asset finance means weighing up factors such as cash flow, balance sheet needs, tax efficiency and credit scores. For many businesses, a sound approach is hire purchase, or HP.

In this article, the team at ABC Finance have put together everything you need to know about hire purchase, particularly if you’re looking for business finance for vans, trucks, cars or essential equipment.

What is Hire Purchase?

Hire purchase lets a business buy an asset in return for payments in instalments, usually monthly, for 1-5 years. The business immediately takes possession of the asset and has full use of it, without restrictions or limitations.

Once the final payment is made (including any remaining fees, usually an option-to-purchase fee), the legal ownership of the asset transfers permanently to the business and the contract finishes.

Essentially, then, hire purchase is a way to spread the cost of a big asset. It falls somewhere between leasing and an outright purchase, and it’s valuable if the asset you want to buy will retain its value over the long term (and for the term of the HP agreement, as a minimum)

How does Hire Purchase work?

Once a business has decided to seek a hire purchase arrangement, a contract will be set up between:

The supplier (selling the asset)
The finance company (which buys the asset from the supplier) and
The business customer, who pays to hire and eventually purchase the asset.

The steps to create a hire purchase agreement

The business customer chooses the asset. They might be looking to get hire purchase finance for trucks, vans, fleet, IT hardware or manufacturing equipment, for example.
The supplier sets the sales price, and the lender agrees on terms and a repayment schedule. The lender purchases the asset for the business customer to then lease.
The business customer pays a deposit, typically 10-20% of the asset’s value.
The business customer then takes the asset for use in the business and pays for it every month (or quarterly). The payment covers the capital repayment portion and the interest charge.
Once the final payment is made, a small option to purchase fee is charged, and the asset becomes the property of the business.

The process above may be familiar if you’ve ever had a private hire purchase arrangement to buy a personal car, for example.

Who maintains the equipment?

Note that during this process, the business using the asset must also insure it, maintain it and take on any running costs.

Who has legal ownership of the asset?

During the hire purchase agreement period, the finance company legally owns the asset. Once the business customer has made the last repayment and the option to purchase fee, it becomes the legal owner.

How is hire purchase different from other types of asset finance?

Here are three main features that distinguish each of these forms of asset finance:

Ownership

The main difference is the ownership. With hire purchase, the business eventually owns the asset. Under a lease, the business merely rents the asset without intending to buy it. And with a business loan, the business gets immediate ownership of the asset, but the loan may be secured against other collateral in the business.

Payments

Payments are also different. With hire purchase, you pay monthly installments to eventually buy the asset. With a lease, you pay to rent the asset, and either return it at the end of the lease or agree to buy it. With a loan, you immediately receive the lump sum to buy the asset, with interest.

Costs

Hire purchase costs can be relatively high, as they cover interest, tax and depreciation, as well as acquisition of the asset. Lease costs tend to be lower as they typically just cover depreciation (and there’s no intention to buy). Loan costs can be the most expensive of all, but this depends very much on circumstances.

In conclusion, hire purchase tends to be popular when businesses want to own an asset without a heavy capital investment at the start. A lease tends to be popular for an asset that quickly becomes obsolete.

How is hire purchase used in businesses?

Hire purchase is used widely in business and across many industries. These are some of the most common categories for HP finance:

Fleet: hire purchase tends to be a particularly common form of business finance for vans, trucks, cars, plant and machinery.
Plant and machinery: HP is used to purchase CNC machines, forklifts, diggers, tractors, and other big-ticket essentials that drive business operations in industries such as manufacturing, agriculture, and construction. (Three of the UK’s biggest sectors.)
Technology and other forms of equipment: Hire purchase can be used to buy diagnostic tools, big-ticket office equipment and other specialist tools to drive productivity.
Renewable energy assets: Increasingly, this form of asset finance is also used to invest in solar panels, wind turbines, EV chargers and other forms of green energy assets.

What are the pros and cons of hire purchase?

Here are some of the main advantages of hire purchase:

The business owns the asset at the end of the HP arrangement.
It’s a budget-friendly approach to big-ticket asset purchases and helps to protect cash flow by swapping a large upfront outlay with regular, predictable payments over a fixed period. This supports business planning and cash flow.
HP payments cover capital and interest for tax efficiency. The interest portion of the repayment is tax-deductible, and the business can also claim capital allowances. For some assets, there may be Annual Investment Allowance (AIA) advantages.
HP repayments come with flexible interest rates and can have either variable or fixed interest, depending on the business’s appetite for risk.
There are no usage limits or restrictions, which helps the business use the asset freely and in the way that it needs to drive productivity, growth and utilisation.
HP strengthens the business’s asset sheet, as it’s a route to asset purchase. This improves the business’s creditworthiness and asset position.

Of course, there are downsides to hire purchase, which may encourage some businesses to look at alternative forms of asset finance:

The business doesn’t own the asset until they have made the final payment. If the business defaults on the payment schedule, the finance company can repossess the asset.
Hire purchase is more costly than leasing because of the interest and charges.
There can be VAT implications. The VAT on the asset’s purchase price must usually be paid upfront. This is usually reclaimable if the business is VAT-registered, but it can present a cash-flow challenge in the short term.
There’s a depreciation risk too, which is particularly pressing for vehicles. If the truck, car, or van loses value faster than anticipated, the business is still tied into full repayments.
Hire purchase agreements are legally binding contracts. An early termination will usually incur penalties.

Is hire purchase right for my business?

Businesses need to weigh up different forms of asset finance very carefully when deciding how to invest in their operation. For most, it makes sense to work with a skilled and trusted finance broker. At ABC Finance, we offer transparent advice and access to the best possible deals.

We also work with each client to understand their unique position and provide all information about the different types of asset finance available. Our advisors help our business clients to consider factors such as:

Asset lifespan (HP is good for assets with a long useful life. For assets likely to be obsolete in a couple of years, leasing tends to be better.)
Affordability and cash flow projections.
Tax and VAT implications, which require accountancy input.
Available deposit.
Preference for fixed or variable interest rates.
Available lenders and those likely to offer the best fit, and their full fee schedule, including administration and final transfer fees.

Is another form of asset finance better for my business?

Again, we work with our clients to understand their goals and assess whether hire purchase is the best route for their needs, or whether another type of asset finance is better. For example:

A finance lease (a rental of the asset, with the option to return or buy at the end)
An operating lease (payment for use of an asset with no ownership) is popular for technology assets with a short lifespan.
Asset refinance to release cash tied up in a valuable asset that you already own, to improve business liquidity.
Business loan — a traditional business loan method that offers flexibility, but also has implications for business creditworthiness.

Every form of asset finance has its value, depending on the business’s objectives, current position and the asset itself.

Access trusted, expert advice with ABC Finance

At ABC Finance, we’re here to help you access the business finance you need to strengthen and grow your business in the best possible way.

Our FCA-accredited, family-run brokerage offers access to some of the best asset finance providers in the industry, with features that include competitive rates, flexible deposit and terms, fast approval and transparent, “client-first” advice.

We always put our clients’ needs and outcomes before our own, and we’re proud to have saved thousands of customers money, stress and time with their business finance!

In fact, we’re so committed to offering the best possible service for our clients that we also have voluntary membership of FIBA (The Financial Intermediary and Broker Association), which exists to raise standards in the finance industry.

Contact us today

Contact our friendly team today to find out more about whether hire purchase could work for your business, and discover the best rates and deals from trusted, reputable lenders that can help your business thrive.