What is a hire purchase agreement and how can it help your business?
Hire purchase (HP) lets you spread the purchase cost of an asset, like a business car or equipment, over a longer period 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.
An asset is anything with monetary value, owned by either an individual or a company. For a business, this might include tangible assets like a combine harvester or an excavator, or it might be intangible goods like property rights.
A hire purchase is essentially leasing an asset until it can be paid off fully.
What businesses can use hire purchase?
Hire purchases are especially common in sectors that involve pricey equipment, like construction, freight, engineering, and manufacturing. It can also be used for small-scale assets, for things like company cars or mobile phones, for example.
Individuals can take out hire purchase agreements for personal use, too – it’s not just for businesses. The most common hire purchase agreements for personal use are for vehicles.
How does hire purchase work?
Hire purchases must be taken out through a finance facility like a broker, bank or building society, or sometimes directly through the owner, such as through a car dealership.
In some cases, hire purchase 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 hire purchase 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.
What are the advantages of hire purchase?
- 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 may get to own the asset.
- Fixed rate loan so interest rates tend to be low.
Can I get out of a hire purchase agreement?
You can end a hire purchase agreement at any time, and this is known as a voluntary termination. You can terminate the agreement in writing and return the asset under the Consumer Credit Act.
This is useful if you can no longer afford the repayments or want to cut costs. However, you will still have to pay all the monthly instalments up to this point.
In many cases, the lender is entitled to payment of half the cost of the asset. So, if you haven’t yet paid half of the overall total cost of asset, you may need to pay this. You will also need to return the asset back in good condition or pay the cost of repairs.
What happens at the end of hire purchase?
At the end of the agreement, you will have the option to purchase the asset for a small fee. The asset is then yours and you can modify it, or sell it, and are solely responsible for its upkeep and repairs.
Should your business choose Hire Purchase?
If your business needs an asset to expand your business but can’t afford to purchase the asset outright, then a hire purchase agreement could be the option for you. Hire purchase allows you to spread the cost of the asset purchase over a longer period with fixed repayments to suit business needs.