Hire Purchase

What is hire purchase?

Hire purchase (HP) enables businesses to spread the cost of an expensive asset over a fixed period, whilst also offering the opportunity to become the legal owner at the end of the agreement.

It is a popular form of asset finance that preserves business capital and provides business owners with a longer-term route to taking full ownership of a balance sheet asset without jeopardising cash flow.

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How does hire purchase work?

A hire purchase agreement requires an initial deposit, which is usually 10 per cent of the asset’s value, followed by fixed instalments for the duration of the arrangement – an HP agreement can typically last for up to five or six years.

The interest rate is fixed and after the final instalment is made, a small completion fee is payable for the business to take ownership of the asset. Again, this is a percentage of the asset’s value.

What are the costs associated with hire purchase?

Interest
The interest rate offered on a hire purchase agreement will be negotiated and based on the circumstances of each business. Interest payments can be claimed against the business’s taxable profits.

Lenders’ fees
The financier will charge certain administrative fees for arranging and maintaining the hire purchase contract.  

Can a business end a hire purchase agreement?

It is possible to voluntarily terminate a hire purchase agreement if repayments become onerous or cash flow is an issue, as the asset is effectively being ‘hired’ until the end of the arrangement.

A lender is typically entitled to demand half of the total cost of the asset in the event of voluntary termination, however. This means that if half of the repayments have not yet been made, the borrowing business will lose money if they cancel the contract.

The business cannot sell the asset without the written consent of the lender whilst the hire purchase agreement is in existence. This is because, until the completion payment is made, it still belongs to the financing company.

What are the advantages of hire purchase for businesses?

Can be used at any stage of business
Hire purchase can be used at any stage of business development from start-up to well-established organisation.

Option to own the asset
The business can take full ownership of the asset at the end of the agreement, which may provide some tax benefits.

Certainty of budgeting
The interest rates and the duration of the agreement are fixed, which gives the business some certainty around budgeting.

Low-risk finance
As long as the business keeps up with the repayments the asset is theirs to continue using.

May be a good option for poor credit businesses
It may be possible for businesses with a low credit score to secure this type of finance, as the asset is hired until the final payment. Lenders might also consider the potential for additional sales to be generated because of the asset when determining eligibility.

How to find the best hire purchase deal

It is vital to compare hire purchase deals across multiple lenders to obtain the most suitable arrangement at the lowest possible cost. We provide our services free-of-charge as commercial finance brokers and search the whole of market for the best deals.

Our team at UK Business Finance knows the criteria of all lenders in the UK and can also make the applications on your behalf. Get in touch to see if hire purchase is the best type of commercial finance for your needs.

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