Hire purchase is the branch of asset finance that lets you purchase the asset but by spreading the cost over time, rather than in one large sum. You pay back for the asset in instalments over an agreed term.
The asset finance provider will agree to purchase the asset for you to lease. During the leasing period the asset is owned by the provider, and they are responsible for insurance and maintenance. You then make regular payments to the provider for the use of this asset and at the end of the leasing period, you take ownership of the asset.
It is a great way to access an asset and by spreading the cost over time it is easier to budget. You also get the asset listed on your balance sheet for the endurance of its lifetime. So, in that sense it is a win.
Hire purchase is particularly suitable for businesses that require expensive machinery, such as construction, manufacturing, plant hire, printing, road freight, transport, and engineering, etc…
A hire purchase agreement can flatter a company’s return on capital employed (ROCE) and return on assets (ROA). This is because the company does not need to use as much debt to pay for assets.
Of course, there are also some drawbacks to hire purchase, and it will not be suited to every company.
Whilst spreading the cost of expensive assets is in most situations a benefit, you must be willing to commit to the payments for the duration as most lenders will penalise you with additional fees. If you are unable to pay for any reason the lending facility could be within their right to seize the asset.
Sometimes by the final payment term the asset has depreciated to such an extent that it is not worth much when it finally becomes yours.
Assets with higher resale values such as, machinery, agricultural equipment, vehicles etc, have more favourable interest rates. Assets that are considered ‘soft’ due to their low resale value, such as, printers, vending machines, office furniture etc, will be given less favourable rates.
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