Hire purchase

How a hire purchase agreement can help your business

Hire purchase offers a way to finance essential business equipment. You make payments in instalments, preserving your working capital. Ownership of the asset may transfer to you upon completion of all instalments, but you are accountable for maintenance and insurance throughout the process.

Assets typically acquired through hire purchase encompass vehicles and substantial pieces of equipment necessary for a business’s operations. Hire purchase agreements may extend up to 10 years in certain instances, with the term usually aligning with the asset’s useful working life.

These agreements enable you to distribute the cost of substantial assets, all the while leveraging their utility to fulfil your customer contracts. Now, let’s delve into how commercial hire purchase operates.

 

How does hire purchase work?

Normally, you make a 10% deposit and upfront payment for the full VAT amount. After your application is approved, the lender buys the asset and establishes a pre-arranged instalment plan with fixed terms.

Upon contract completion, you can opt to transfer ownership of the asset, though it might reflect on your balance sheet from the start. If you decide to take ownership, a ‘balloon’ payment is made at the term’s end. Adjusting this final payment might potentially reduce your monthly repayments.

 

What type of businesses use hire purchase?

Industries such as manufacturing, construction, transport, and engineering frequently adopt hire purchases. It proves to be a fitting financing solution for both growing and well-established businesses requiring costly equipment to operate efficiently.

Hire purchase becomes a favourable finance choice when the asset’s depreciation is gradual. Additionally, the duration for which you require the asset must be considered; for shorter terms, alternative funding options may be more appropriate.

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Benefits of hire purchase as an asset finance option

• Preserves valuable working capital
• Potential eligibility for capital allowances
• Interest can be offset against profits for tax purposes
• Flexibility accommodates seasonal business fluctuations
• Fixed repayments facilitate improved budget management
• Optimises cash flow
• Full use of the asset with possible ownership at the agreement’s end
• Finance is secured against the asset, reducing emphasis on trading history and credit rating

After considering the advantages, are there any drawbacks to opting for a hire purchase? The fixed nature of the contract implies that should your business face a decline, rendering you unable to afford the repayments, you might have to relinquish the asset. Moreover, it’s worth noting that the total cost through hire purchase exceeds the actual cash value.

For additional details on hire purchase and its compatibility with your business, reach out to our specialists at Vanguard Insolvency. With connections to over 50 top commercial finance lenders nationwide, we can assist you in obtaining the necessary funding.