HIRE purchase (HP) originated in the US as a consumer product.
Over the years, thousands of people have used this financing arrangement to buy domestic products and cars. People often refer to this as buying on “the never-never”.
Initially, seen as a way of helping producers move stock, nowadays it’s use is widely by commercial organisations. This spreads the cost of buying capital assets over a period, no longer than the item’s life span, to help cash flow. It can help encourage growth and speed up business expansion.
Small scale companies and entrepreneurs can all benefit from hire purchase. You can use expensive and cash-generating assets from very first day and plough that money back into the business.
If you are running a business you might be looking to acquire plant, machinery or even commercial transport. HP is a viable option for most fixed assets and by many varied industries financing everything from livestock to refrigerated shop displays to IT equipment. And if you operate in a seasonal industry, seasonally-adjusted payments can be negotiated to help cash flow.
Hire purchase gives great flexibility.
The amount of the deposit and term of the finance are all negotiable. You can combine the certainty of a fixed cost for the length of the agreement and the option to purchase the asset at the end of the contract.
Many people feel more in control of their finances when using HP. In the case of a commercial vehicle, you can decide whether or not to buy it at the end of the agreement. Or you can, reduce monthly payments by paying a final lump sum, known as a balloon payment. Other options include fixed or variable interest rates.
But HP isn’t just about buying new kit. You can refinance existing assets to raise cash. In some cases businesses enter a sale-and-leaseback deal. This sees the selling of an existing asset to the finance provider to raise cash They lease the item back to the business so the business owner continues to have use of the asset.
HP also offers tax benefits as depending on the asset capital allowances will reduce tax liabilities.
You can also offset repayment interest against your profits and reclaim VAT – certain rules do apply to cars.
If you are looking at commercial hire purchase remember that the asset forms the security for the finance provider and if your financial situation changes during that period and you can’t afford the agreed monthly repayments, you may lose the asset.
Although the financed item appears in your balance sheet, legal ownership does not transfer to you until the final payment is made.
Overall, you will pay more for the asset, if compared to buying for “cash”, as you’re paying interest in addition to the cost of the product.
But it enables you to acquire an asset immediately without “gobbling up” cash flow. Also, when making a decision, balance this against the added value to your business the asset will generate.
In brief, you can finance most of your fixed assets. Hire purchase means you can own the asset using flexible terms including seasonally adjusted payments. You can choose fixed or variable interest rates to help payments and be most tax-efficient.
Talk to us at WF Financial Solutions about the advantages and disadvantages of instalment finance/credit.