Hire purchase or leasing is a means by which 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 that has a monetary value that is acquired by a business or an individual. Such assets on the balance sheet of a company include machinery, office equipment and furniture, inventories, real estate and other such items.
Hire purchase and leasing although have the same principles of enabling the control of assets differ in several ways. When leasing the lessee does not have rights to the goods, at the end of the lease period the lessee can return the goods to the lease company, they may have the option to extend the lease ( check terms and conditions) or may be able to introduce a third party to purchase the goods. Hire purchase is a purchasing solution well suited for a business wishing to goods without paying the outright purchase price. When considering taking out a loan it is important to consider the differing treatment for tax and accounting purposes with regard to leasing and hire purchase. It may be beneficial to seek advice from your accountant.
Hire purchase enables you to have the use and the benefits of goods without the capital outlay that can be prohibitive. Hire purchase can be used to purchase machinery, vehicles, office furniture and equipment and any such item that may be of benefit to a company or individual. Hire purchase allow the purchase of goods through making set instalments over an agreed period of time generally between a1 and 10 year period, depending upon the lender. Under such an agreement the buyer does not become the owner of the goods until such a time that all of the instalments have been made. When entering into a hire purchase agreement there is generally an up front payment required known as a deposit. The balance of the purchase price is then paid through a scheduled payment plan over a period of time agreed 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 the initial payment (deposit) has been paid. 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 are able to meet the repayment requirements. Used correctly hire purchase can help fund the growth of a business and can help with cash flow without the large outlay of capital. 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 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, whereas items with a low second hand value such as office equipment and furniture with a low residual value may attract a higher rate of interest.
In the event that the company is unable to 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 a to the hire purchase company as a last resort if all other avenues have been exhausted. In the event that 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.
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