What are the advantage and disadvantages of hire purchase?

As a result, businesses are increasingly turning to hire purchase as a solution to finance their new equipment. Hire purchase is a type of asset financing that allows businesses to buy the assets they need and pay in instalments over time.

Not sure if hire purchase is the right type of asset finance for your business? In this article, we take a look at what hire purchase is, how it works, and the advantages and disadvantages of this type of business finance.

Hire purchase is a form of asset finance that allows businesses to spread the cost of assets over a set period of time. Businesses often use hire purchase asset finance to access the equipment they need to operate, without impacting their cash flow.

Hire purchase is similar to equipment finance leasing, but rather than renting the asset, you purchase it and pay in instalments.

This type of finance is commonly used by businesses that require high-value equipment, including manufacturing, engineering, healthcare, and construction. However, it can also be used for smaller-scale assets too, including company cars and IT equipment.

A hire purchase agreement is a type of asset finance contract.

Hire purchase agreements usually have a term of between 2 and 5 years, although they may be shorter for smaller purchases. At the end of the agreement, ownership of the asset is transferred over to the lessee.

When financing equipment through hire purchase, you will usually pay a deposit, typically at least 10% of the overall value of the asset. This is followed by monthly instalments, fixed at a set amount over the agreed term. During this time you do not own the asset.

Once you have reached the end of the agreement period and paid all the instalments, you will own the equipment or asset.

Businesses are within their rights to end a hire purchase agreement at any time and return the assets if they no longer need them, or can no longer afford the monthly payments. However, in this situation, payments will still need to be made to cover the time that the business was using the asset. If the payments fall below half the value of the asset at the time the agreement is terminated, then you may be required to make additional payments to meet the agreed minimum.

If you’re considering using hire purchase to access equipment or other assets for your business, it’s important to be aware of the advantages and disadvantages of this type of business finance.

Here are the key advantages of hire purchase:

Flexibility

Hire purchase is a flexible form of asset finance. Both the monthly payments and the length of the agreement can be adjusted to meet the needs of the business.

Cash flow

With hire purchase, businesses can spread the cost of equipment, allowing them to manage cash flow and keep valuable working capital within the business. Paying a fixed amount each month over a set period will also help financial forecasting.

Ownership

Unlike other types of business lease agreements, once you have made the last hire purchase instalment, your business will own the equipment.

Fixed interest

With hire purchase agreements, interest is fixed for the duration of the agreement, so your repayment amount will never change. Many hire purchase agreements offer a lower rate of interest than other types of business finance, such as bank loans and overdrafts.

Immediate access

By spreading the cost of high-value assets over time, your business can access the equipment immediately, rather than having to wait to save up the necessary funds. This supports business growth and expansion.

Easy to obtain

Hire purchase is usually a relatively simple form of business finance and typically quick and easy to obtain, in comparison to more traditional finance options.

As with any type of business finance, there are also a number of potential disadvantages to consider, including:

Asset depreciation

Almost all assets depreciate in value over time. It’s important to keep in mind that, depending on what type of equipment you’re financing with hire purchase, it may be at the end of its useful life by the time you reach the end of the agreement, meaning it will need to be replaced.

Overall cost

With hire purchase, you may end up paying a higher overall cost than if you bought the equipment outright.

Ongoing fixed payments

Spreading the cost of an asset over a longer period of time is beneficial for most businesses, however, it’s important to remember that you are committing to the payments for the full term of the contract. This means that, if you experience any financial difficulties in the future and are unable to pay, the lender may seize the asset.

At CHG-MERIDIAN, we offer various asset financing solutions for businesses, including hire purchase agreements. To find out more about our hire purchase financing services, please get in touch.