What is a hire purchase?
It is a method of purchasing expensive consumer items in which the buyer pays a down payment and the rest over a period of time, including interest. Ownership of the goods does not technically pass to the buyer until all payments have been made under a hire-purchase arrangement. With a hire purchase plan, a company can maximize working capital, improve its financial presentation to investors, and have the option of flexible payment terms.
Benefits of Hire Purchase
The most significant advantage of a hire purchase plan for a company is that it removes the need for a large upfront payment.
This is especially beneficial for businesses that need expensive equipment but lack the immediate funds or prefer to avoid additional debt. By spreading out the cost, businesses can manage their finances more effectively.
That also means your business can now access higher quality equipment that might otherwise have been unaffordable.
The most obvious advantage of a hire purchase plan for a company is that it does not have to pay the entire purchase price upfront. For a company that needs to buy expensive equipment but doesn’t have the money or doesn’t want to take on additional debt, this can be a great option to consider. Equipment lease payments and equipment ownership costs can sometimes be removed from a company’s books, resulting in better-looking return on assets (ROA) ratios.
Using hire purchase might give your company access to some really top-notch equipment. You might not be able to afford to buy the very best equipment via a one-off cash purchase, but with hire purchase, you can buy a high-specification item, start using it immediately, repay the purchase price in installments over several years and then become the owner of the asset at the end of the term.
You may be able to get your hands on some high-quality equipment if you use hire purchase. Purchasing the greatest equipment on a one-time cash basis may be out of the question; however, with hire purchase, you may purchase a high-end item, begin using it right away, pay for it in instalments over a period of time, and eventually own it.
Improve cash flow
Another adverse impact of purchasing an item with a one-off payment is that your cash flow could be impacted. You can avoid making a large single payment with hire purchase, so hopefully, your cash flow position will be much healthier.
Buying anything with a one-time payment can also have a negative influence on your cash flow. Hire buy allows you to avoid making a huge single payment, which should improve your cash flow.
Fixed repayments
A hire purchase lender will not alter your interest rate during the term. This means budgeting is straightforward and there won’t be any nasty surprises – you know exactly what you will be paying back each month for the rest of the term. Hire purchase plans often include maintenance in the contract, which means that the company does not have to worry about expensive repair costs that may arise. In some cases, it may be more tax-efficient to expense the rental payments rather than purchase and depreciate the equipment. The company is not required to keep the equipment under a hire purchase plan, and payment terms can be flexible.
During this period, a hire purchase lender will not change your interest rate. So, budgeting is simple and there are no surprises — you know precisely how much money you’ll be paying back each month for the remainder of your term.