Hire Purchase or Leasing

Intro

Hire purchase or leasing is how a company or an individual can acquire and control an asset for a predetermined time contractually agreed with a lending company. An asset is an item or goods with a monetary value that a business or an individual acquires. Such assets on a company's balance sheet include machinery, office equipment and furniture, inventories, real estate, etc.

Hire purchase and leasing differ in several ways, despite having the same principles regarding enabling asset control. With leasing, the lessee does not have rights to the goods as the lender owns them. At the end of the lease period, the lessee has three options: return the goods to the lease company, extend the lease, or introduce a third party to purchase the goods. 

Hire purchase is a purchasing solution best suited to businesses who want the use of goods without paying the outright purchase price. 

It is vital to consider the differing treatment for tax and accounting purposes concerning leasing and hire purchases when taking out a loan. It may be beneficial to seek advice from your accountant. 

Hire Purchase

Hire purchase enables you to have the use and the benefits of goods without the prohibitive capital outlay. Hire purchase can be used to purchase machinery, vehicles, office furniture and equipment and any such item that may benefit a company or individual. Hire purchase allows the purchase of goods through set instalments over an agreed period, generally between one and ten years, depending upon the lender. Under such an agreement, the buyer does not become the owner of the goods until all of the instalments have been paid. When entering into a hire purchase agreement, a deposit is generally required as an upfront payment. The purchase price is then delivered through a scheduled payment plan over an agreed period and confirmed within the hire purchase agreement. When taking out a hire purchase agreement, the hire purchase company will generally charge interest upon the balance outstanding after paid deposit. The amount of interest may vary from borrower to borrower and will be incorporated into the repayment schedule. There are benefits and risks attached to all forms of borrowing; before entering into any agreement, you must be sure that you can meet the repayment requirements. Used correctly, hire purchase can help fund the growth of a business and can help with cash flow without the significant upfront costs. Careful use of hire purchase enables a company to keep the debt used to pay the hire purchase and the asset purchased by the means from the balance sheet; this can result in a higher operational and ROA figure (return on asset).

Interest Rates

Interest charges within the hire purchase agreement may vary depending upon the type of purchase the company or individual is considering. Rates may be more favourable for goods with high residual value, such as machinery, heavy plant, agricultural equipment or vehicles. In contrast, items with a low second-hand value, such as office equipment and furniture with a low residual value, may attract a higher interest rate.

If the company cannot meet the agreed repayment schedule, it may be possible to return the goods and render the agreement void; before taking this action, check the terms and conditions and contact the hire purchase company to try to reschedule the repayment plan. Only consider the return of the goods to the hire purchase company as a last resort if all other avenues have been exhausted. If the goods are returned, you may still be liable to pay a settlement figure agreed with the hire purchase company.

Hire purchase when making a considered purchase is an ideal solution for a business that is expanding and has cash restrictions on its development and can be used as a tool to enhance the growth and prosperity of a company.

Love Finance are experts in providing all types of finance for companies large and small; complete our simple online enquiry form to discuss the different options available, including hire purchase, leasing and business loans.