Hire Purchase 2018-06-15T10:48:10+00:00

Hire Purchase

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What is Hire Purchase?

Hire purchase is a method of funding an asset purchase and allows you to spread the cost by paying for it in fixed monthly instalments over an agreed term.

Hire purchase differs from standard business loans and lease agreements, sitting somewhere in the middle of both. When buying a new piece of equipment using hire purchase, you are hiring the item over an agreed term, with the option to buy it at the end of the term.

Although you’re hiring the item, depending on the specific agreement with the lender, the item may appear on your balance sheet from the start of the contract.

When buying through a hire purchase, the lender will usually expect a deposit of 10% and any VAT is usually paid upfront.

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The Advantages & Disadvantages

Before considering the hire purchase route, take a look at the positive and negative aspects below to see if it’s the right decision for you and your business.

Advantages

  • Hire purchase can be a very tax-efficient way of acquiring assets, with hire purchase costs being an allowable expense against pre-tax profits.
  • Payments are flexible. You can reduce your monthly payments by increasing the balloon payment at the end of the term.
  • Your cash flow is protected from lump sum acquisition costs by spreading the cost over a longer term.
  • The flexible repayments may allow you to acquire a higher spec model than may be otherwise affordable.
  • Some lenders will allow you to structure your monthly repayments to suit seasonal fluctuations in trade.

Disadvantages

  • If the balloon payment isn’t affordable, you may be unable to keep a piece of equipment that you need.
  • If you only need the equipment for a short time, hire purchase may not be the best item for you.
  • The cost of finance means that the item will usually cost you more than it would to buy without finance.

How Does It Work?

  1. The asset finance lender buys the item that you are looking to acquire.
  2. A 10% deposit is usually paid and the item is then leased from the funder for a pre-agreed term.
  3. Once the term expires, you choose whether you wish to keep the item. If you do, simply pay the balloon payment and take full ownership.

Is Hire Purchase Right For My Business?

There are a number of considerations when deciding on the right asset finance product for your business. Whether hire purchase is right for you will depending on the following:

How Long Do You Need The Item For?

If you’re thinking of acquiring an item that will only be needed for a short time, then hire purchase may not be the most suitable route. Depending on how long the item is needed for, short term hire or leasing would most likely be a more flexible and therefore suitable option.

When Will The Item Need To Be Replaced?

If the item will soon be replaced by a newer version, and will become redundant, shorter term, more flexible options such as a lease may be the better route.

What Is The Depreciation Profile Of The Item?

Where depreciation is minimal, hire purchase can be a great option. Items that depreciate quickly should consider leasing the item, if the item will not be retained for a very long time. Where the item will be used for a long time, the residual value may be less of a factor in the financing decision.

Getting Started

To get started with your hire purchase application, enquire online or call us on 01922 620008. Our advisors will talk through your requirements and where possible, issue written terms within two hours of your initial conversation.

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