Hire Purchase - Advantages and Disadvantages

Published on 13th September 2018

At every stage in your business’ development, you’re going to need access to various equipment in order to maintain, or even expand, your day-to-day operations. After all, when your operations grow, so does the potential of your business. However, providing your business with the equipment it needs to go further isn’t easy and can eat a hole in your finances if you were to use your own savings. This is where Hire Purchase can prove instrumental in getting your business from A to B. Hire Purchase is one of a group of finance products that fall under Asset Finance and is designed to help spread out the cost of valuable equipment. But, as always, in order to know whether Hire Purchase is suitable for your business, you need to be fully aware of the advantages and disadvantages of this type of finance before placing your application.

Advantages

For many business owners, Hire Purchase is a great way of the acquiring the use of valuable assets (equipment, machinery or vehicles) and eventually gaining ownership of them. It is often used to finance expensive equipment that either has a slow rate of depreciation or isn’t likely to become outdated in the near future should newer models be released. So, rather than parting with a large amount of capital in order to support an upfront purchase, you can spread out the costs over the course of the agreement, which typically lasts up to 5 years. As such, Hire Purchase is particularly useful for businesses with limited budgets who simply can’t afford the expense without depleting their savings or diverting funds away from key areas.

In addition, Hire Purchase also presents a variety of other benefits as well. For one, such agreements tend to include maintenance so if the equipment becomes damaged and needs repairing, there’s no need to get into a panic about paying out for repairs. Plus, this product could also be used as a way of preventing the funds used to obtain the equipment appearing on your balance sheet, improving your return-on-assets (ROA) ratio. You may also be eligible to reclaim VAT as well but should discuss this with your business’ accountant before applying.

Looking to acquire valuable assets for your business? Lack the necessary capital to support an upfront purchase? Apply for a Hire Purchase agreement or learn more about how your business could benefit.

Disadvantages

However, although Hire Purchase can be a useful product to have at your side, there are aspects that you need to be aware of as well. For one, Hire Purchase is a secured form of asset-based finance, so if your business defaults on its repayments, the lender will remove the equipment from your premises and you’ll also lose the capital that you’ve already paid in. The fact that you’ve defaulted will also affect your credit rating, making it more difficult, or expensive, to gain finance in the future.

This type of funding also tends to use Fixed Monthly Repayments, meaning that the amount you’ll need to repay each month is set at a specific amount. As such, using a Hire Purchase agreement will make the overall cost of the equipment more expensive on account of interest and any associated service fees from the lender. This could also make keeping up with the agreement more challenging, especially if your business encounters a slow trading period. Plus, before you can even gain access to the equipment, you’ll also need to pay an upfront initial deposit which will involve the equipment’s full VAT and an agreed percentage of its purchase price (subject to negotiation).

In addition, whilst the agreement is in operation, you’re not classified as the owner of the equipment until the final repayment has been made to the lender. This could cause issues if your business was to file for bankruptcy during the agreement as the equipment wouldn’t be protected. Plus if the equipment was stolen or destroyed, your insurance policy may not cover to the full expense, meaning that you may need to pay the excess. However, you can apply for Gap Insurance which will protect your business should such a scenario ever arise.

Thinking of applying for Hire Purchase?

No matter your size or sector, the integrity of your day-to-day operations will, no doubt, rely on you gaining access to valuable equipment. The problem, however, is the expense, which could strain your finances. But without them, you won’t be able to provide the goods or services your customers expect, paving a way for your competitors to overtake you. However, applying for a Hire Purchase agreement could provide you with the means to acquire the use of valuable equipment without having to support a large upfront purchase. All you need to do is source a suitable agreement from a lender you can trust, which is where we can help.

At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking acquire valuable equipment but lack the necessary capital, apply for a Hire Purchase agreement today or find out more with Rangewell.


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David Harrison

David Harrison

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