Types of hire purchase and how you can use them
You will learn
- What is hire purchasing
- What the benefits of hire purchasing are
There are lots of hire purchase types that you can use in your business. Also known as HP or Lease Purchase (or sometimes ‘never-never’!), it is a method of buying business assets through making installment payments over a pre-determined period of time. There are lots of types of hire purchase that you can use to purchase vehicles, plant & machinery or, in certain circumstances, ‘soft assets’ such as office furniture and even computer software.
Under a HP contract, the buyer is technically leasing the goods and does not obtain ownership until the last payment is made. When a sum, which is equal to the full purchase price plus interest, has been paid in full the buyer can then exercise an option to buy the assets at what is normally a nominal amount. Alternatively, the buyer is able to return the goods to the owner. If, however, the buyer defaults on making the agreed payments, the owner (typically a bank or finance company) is able to repossess the assets.
Utilising the different types of hire purchase can be really helpful for business owners to cover the cost of paying for and using assets.
Benefits of using the types of hire purchase:
Hire purchasing spreads the cost of the asset purchase over pre-determined installments, which can make the cost of purchasing the goods affordable and thereby help your cashflow whilst having the ability to use the assets in your businesses from day one.
It is also possible to reduce the monthly repayments by paying a final pre-agreed lump sum, often known as a balloon payment.
HP provides the certainty of fixed costs for the duration of the agreement. You can usually decide whether to take a fixed or variable rate option.
Normally, you would be able to reduce your tax bill by claiming depreciation/writing down allowances. The cost of the borrowing (interest and other associated costs) can usually be offset against profits to reduce your tax liability. VAT charged on the purchase price is normally recoverable if your business is VAT registered.
The business owner decides whether to purchase the asset or not at the end of the agreement
Depending on what local grant schemes are available, capital grants may be available to assist you towards the purchase price. This often depends on associated employment creation. Because of the rules of ownership of the asset under HP contracts, some grant schemes release grant over the term of the agreement rather than in full on day 1. Check with the grant provider first.
There are many advantages to the different types of hire purchases but very little in business comes without drawbacks and risks, and HP is no exception to this.
The main downside of course is that you need to find the money to make the agreed payments! If you don’t, you’re in great danger of losing the asset, which could have a serious negative impact on your business. Defaulting on repayments is also likely to damage your credit rating which could restrict your ability to obtain business, and possibly personal, finance in the future.
As mentioned above, under a hire purchase agreement, repairs and maintenance of the asset are your responsibility for the duration of the agreed term even though you don’t technically own the goods until the final payment is made; this isn’t the case under a lease agreement.