If you need to buy something for either yourself or your business but you don’t have the immediate funds to hand, a hire purchase scheme can be a great way of getting your hands on it quickly while spreading the cost over an agreed period.
This method of financing results in a monthly repayment and transfer of ownership to you once the term ends and all funds have been repaid. There are some significant advantages and disadvantages to hire purchase though. Throughout this post, I’ll run through the most notable.
Advantages of hire purchase
Rather than one big lump sum, you can spread the purchase cost of high ticket items. These include items such as cars, where you can pay over a period of 3 to 5 years typically.
As the hire purchaser, you’ll own the asset after paying the last instalment which can make it a favourable alternative to a lease.
You’ll have immediate use of the item once the agreement with the vendor has been signed off, rather than wait until you have saved enough.
Hire purchase is a simple way of financing and typically relatively easy to obtain.
The interest rate on hire purchases is fixed for the duration of the agreement. This is regardless of any changes the Bank of England make to the base rate.
You can usually choose from a fixed term and deposit amount which reflects your circumstances and budget.
Disadvantages of hire purchase
Hire purchase contracts are usually fixed, therefore if you find yourself in financial difficulty during that period, you may lose the asset and damage your credit rating.
You’ll pay more for whatever it is you’re financing through hire purchase.
You won’t own the asset until you have made the final hire purchase payment. Therefore the vendor has the right to seize it should you fall foul of their terms.
Because you won’t own the asset, it won’t be protected if you’re made bankrupt. This is because it is technically still owned by the vendor during the agreement.
The duration of most hire purchase schemes can be quite long – anywhere between 3 to 5 years. If it’s for a car, that can make a lot of sense, but for other purchases you’ll need to consider if there really is a benefit in spreading the cost for that length of time.
Hire purchase agreements aren’t free. As with all forms of financing, you’ll pay a fee for spreading the cost. Many hire purchase schemes can prove quite costly in that regard.
Mind the gap! If you are buying an asset – such as a car – and it is stolen/ destroyed before it is fully paid for, the insurance may not cover the replacement value. This means you could face a shortfall. “Gap insurance” can be arranged to cover this situation – but will add to your costs.
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A Hire Purchase Agreement could be the perfect way of acquiring new assets whilst protecting the cash flow of your business.
Using a Hire Purchase Agreement could be a cost effective means to buy new assets and allow you to spread the cost of them over a period of time, ensuring that your business remains in a strong liquidity position and can continue to meet its financial obligations. Finding the right provider for your Hire Purchase Agreement can be difficult, so why not let Wffinancesolutions.co.uk do it for you?
What is a Hire Purchase Agreement?
A Hire Purchase Agreement is a form of asset finance which provides a way for your business to buy new assets and spread the cost over a period of time, typically the useful economic life of the asset you are purchasing. A Hire Purchase Agreement would involve your business paying an initial deposit and then paying the remaining balance in instalments, gaining full ownership of the asset upon final payment. By using a Hire Purchase Agreement, your business can acquire new assets without suffering a dent in cash flow.
The benefits of a Hire Purchase Agreement
A cost effective solution – A Hire Purchase Agreement can provide a cost effective way to purchase assets.
Assets will appear on the balance sheet – Assets purchased using a Hire Purchase Agreement will appear on your businesses balance sheet even before you have paid the final instalment. This may make them eligible for use as security against loans and other means of finance, as well as increasing your business’s value, making it more attractive to investors.
Preserves vital cash flow – By spreading the cost over a period of time rather than paying it all at once, you avoid the sudden drop in working capital which could potentially cause problems for trade.
Can allow tax benefits – in the eyes of the tax authorities, assets bought through a Hire Purchase Agreement belong to you from the beginning of the process. This means they may be eligible for certain tax relief, such as capital allowances.
Gives your business access to superior equipment – Using a Hire Purchase Agreement to fund the acquisition of business assets can mean that your business is able to access more expensive equipment than if paying outright.
Can allow for simpler forecasting – The instalments for a Hire Purchase Agreement will be fixed and spread out over a set period of time, allowing for simple budgeting and easy cash flow forecasting.
Who is a Hire Purchase Agreement for?
A Hire Purchase Agreement is designed for businesses of all sizes looking for a way to buy new capital assets in a way that preserves cash flow, or who are looking to gain access to more expensive assets through paying in instalments. The variety of assets that a Hire Purchase Agreement can be appropriate for is extensive and they are appropriate for most industries.
How can Wffinancesolutions.co.uk help?
The range of lenders offering Hire Purchase services is vast and the subtle distinctions between them can be the difference between getting a good deal and getting a product that is inappropriate for your needs. Wffinancesolutions.co.uk understands the ins and outs of these subtleties and has years of experience to call upon in order to source you a solution that not only fulfils every requirement, but at the best possible price. For a free, no obligation consultation, get in contact with one of our advisors today.
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