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Hire purchase (HP) is a finance option for businesses that allows you to buy assets and pay back in instalments over a set period of time. In a hire purchase agreement, you legally own the item once all the instalments have been paid in full. Certain hire purchase agreements will allow the asset to appear on your balance sheet at the start of the term.
Hire purchase finance is also known as lease purchase, with agreements usually lasting between 1 and 5 years. Although it is a hire purchase loan, the borrower usually purchases the equipment from the company at the end of the contract. This is in comparison to other forms of finance where the asset is returned at the end of the lease period, such as an operating lease.
The hire purchase definition business wise is: "A transaction where goods are sold on the basis that payment will be made in instalments". This standard hire purchase meaning applies to both individuals and businesses, as it is a common form of asset lending.
So, what is hire purchase in business terms? Business hire purchase is a popular form of finance, as it allows companies to purchase necessary assets quickly. These would usually be unattainable if current working capital levels are too low. Although, it is different from other forms of lending, as the borrower does not own the goods until the repayment period ends.
This means that essentially the borrower is hiring the goods and paying an agreed amount for a set period of time. During this period, the borrower is not allowed to dispose of the hired goods without the permission of the lender. If these terms are broken it is actually considered a criminal offence
With so many asset finance options available, it's important to have a clear understanding of how each type of option works. We explain further what hire purchase offers and what you can use it for.
Hire purchase, also known as HP, is a type of lease agreement which contains the option to purchase the asset it's taken out against. Hire purchase allows your business to purchase and own the asset without paying the full value immediately. This solution to purchasing assets is ideal for businesses who want to prevent tying up vital capital that they need now.
Usually an initial deposit is required, the amount will vary depending on the lender's terms, however, you can typically expect to pay around 10% of the purchase price. The remaining balance plus interest, is repaid over a fixed term from one to five years by monthly instalments.
The duration of the agreement can be set to suit your budget and business needs, to ensure that your monthly repayments are affordable.
Providing that you meet the agreed repayments, on completion of your hire purchase agreement, the ownership of the asset transfers to you. It's important to note that the asset is likely to depreciate over the period, with hire purchase, you are responsible for the upkeep and maintenance of the goods. As the ownership of the asset is transferred at the end of the agreement, it's imperative that you look after the asset to retain as much value as possible.
Hire purchase funding will appeal to businesses that wish to retain ownership of the asset, whilst preventing an impact on cashflow.
Whether you are looking for a car hire purchase calculator or to simply compare options, our team can help. To find out more about business HP agreements or to compare HP options, please contact our experienced business hire purchase team today.
Hire purchase (HP) is a financial arrangement between a lender and the user. The benefits of using hire purchase for your assets are:
Reduces impact on business cashflow, freeing up capital within the business.
Spread the cost of repaying with regular instalments over a fixed term.
The lenders security is taken against the asset and not over the business.
Low deposits are often available.
On-balance sheet funding allows you to maximise your asset base.
Transfer of ownership for the asset at the end of the agreement.
If you are looking to compare hire purchase agreements, you are likely to quickly find that many lenders exist. In general, the types of agreements are very similar. The only variations between terms will depend on the specific features of contracts. To ensure you agree terms which suit your specific requirements, it is important to compare hire purchase terms.
The finance provider will set out the following information, which will determine the terms of the business hire purchase agreement:
A description of the goods included in the contract.
The price for the goods if brought in cash.
The price, which comprises the total sum to be paid during the agreement and at the end of the contract.
The deposit amount.
The monthly instalment amounts, interest rates and any potential charges.
A detailed description of the rights of each party, such as the ability to cancel within a designated cooling off period.
The right the hirer has to terminate the contract and under what terms this would be possible.
A contractual agreement is signed beforehand, which sets out the terms of the hire purchase. During the term of the finance lease, the user will pay a monthly rental to the asset finance company to cover the original cost of the goods.
Under the terms of the agreement, you are obliged to pay all of the rentals up to the end of the contract. A finance lease is usually a non-cancellable agreement, although it may be possible to terminate early.
Finance leasing provides flexibility and freedom - you don't have responsibility for something that you do not own, although due care is essential.
In the majority of situations, it is possible to purchase an asset through business hire purchase contracts by paying a small deposit. For example, the HP company may require 10% of the value of the asset. The remaining cost of the goods is then paid off in instalments over a term of 1 to 5 years.
The loan provided during the agreement is secured against the asset, so it is not owned outright until the last payment is made. There may be a final payment to make, which is referred to as a balloon payment. However, this will vary between agreements, so it is important to compare hire purchase options.
The best hire purchase example for businesses, is the use of an agreement to obtain a fleet of vehicles. For example, hire purchase vans, car, lorries and other machinery. There are a variety of advantages when using business hire purchase cars or van hire purchase agreements. However, other forms of finance exist such as finance leasing and operating leases.
At the end of your hire purchase agreement you will make a final payment and the transfer of ownership takes place. The details will be set out in your agreement, however, you can expect one of the following to occur:
You keep the asset and continue to use it.
You may wish to sell the asset and upgrade.
If you are a business looking to finance the purchase of a new asset, the two options available are a business HP contract or lease finance. Both are designed to allow a business to spread the cost of acquisition over a more affordable period. However, there are some differences between the two. The key difference is that with lease finance the asset is loaned, whereas with HP there is an option to eventually purchase.
By partnering with a wide variety of lenders, we can offer a variety of hire purchase bad credit options. Whether you are looking for hire purchase cars bad credit agreements or a way to finance start up equipment, we can help.
We have the most comprehensive list of lenders available, which means you can effectively compare business hire purchase availability. Our hire purchase comparison service will provide you with access to the best hire purchase deals. Simply enter your details into our hire purchase loan calculator comparison tool and within 2 minutes you will have a comprehensive list of options.
Once we understand your business HP requirements, our team will be able to help you compare hire purchase contracts. We can help you compare hire purchase interest rate terms, repayment amounts, contract lengths and more.
With hire purchase accounting, the ownership is likely to transfer to the business, so the asset is included in the balance sheet. This is different to leasing agreements, as the lessee does not have any ownership rights relating to the asset. It is also possible to reclaim VAT on HP agreements. Simply, offset repayment interest against any profits and re-claim the VAT.
There are several differences between HP lease agreements including:
Depreciation: In a lease finance agreement the business can claim depreciation as an expense. However, with these agreements the hirer claims this as an expense.
Duration: Lease financing will have a longer duration and is typically used for larger assets. A HP agreement tends to be for lower value assets with a shorter repayment period.
Maintenance: In HP agreements, repairs and maintenance are the responsibility of the hirer. However, within a finance lease this is the responsibility of the lessee, although operating leases are different.
The main advantages of HP agreements is the flexibility they provide to businesses and the low deposit requirements. In most situations, there are no restrictions on usage levels, and it is possible to return the goods half way through the contract. The fixed interest rates also mean that it is possible to budget effectively with business hire purchase arrangements.
However, as the goods are not owned, if the business falls into financial difficulties the finance provider can remove the goods.
Until you have made at least a third of the payments, the lender is able to repossess the asset without obtaining a court order.
If you are looking for the most affordable means to purchase assets, a business hire purchase agreement may not be the most competitive option. The repayment amounts will typically be higher than other leasing options, especially if you need a short-term agreements. This is why it is so important to effectively compare hire purchase options to find the best deal.