Hire purchase (HP) lets you spread the purchase cost of an asset, like a business car or piece of equipment, over a period of time with fixed regular payments. It can be flexible on the cost of your deposit, monthly payments and the final lump sum to suit your business needs.

A hire purchase is essentially renting an asset until it’s paid off fully, after which, you will own it outright.

HP must be taken out through a finance facility like a broker, bank or building society, or sometimes directly through the owner, like a car dealership.

In some cases, HP agreements will include a final payment to confirm the transfer of ownership. The payment period for larger hire purchase agreements typically ranges between 2 and 5 years, while smaller purchases may be shorter.

During the HP payment period, you can use the asset as if you own it, but you cannot legally sell or dispose of an asset that you’re borrowing via hire purchase until you’ve paid for and then own it. If a business fails to make payments on time, they run the risk of the assets being repossessed and returned to the original owner.

• A useful agreement if you can’t afford to make a big payment upfront.
• Flexible payments are an option to reduce your monthly payments by paying a larger deposit or a large sum at the end of the agreement.
• At the end of the contract, you will own the asset.
• You can defer the VAT for 3 months with HP.
• Fixed rate loan so interest rates tend to be low.

If your business needs an asset to expand but can’t afford to purchase the asset outright, then a hire purchase agreement could be the right option. Hire purchase allows you to spread the cost of the asset purchase over a longer period with fixed repayments to suit business needs.

At the end of the term, you can simply hand the asset back to the finance company.

However, you may be offered a secondary period lease for a nominal amount, known as a ‘peppercorn’ rental – essentially starting the lease again.

A third option is selling it to a third party that isn’t related to your business, at a fair market value.

If you sell it for more than the final payment of the asset, you will be able to keep a pre-agreed percentage of the net sale profit. However, if it’s worth less, you will be invoiced for the difference.