Hire Purchase (HP) is one of many options when financing an asset for your business. Here at Charles & Dean, we want to ensure that you understand Hire Purchase, including the benefits and drawbacks of this financing method and why speaking to a member of our broker team can benefit you and your business.
What is Hire Purchase?
Hire Purchase (HP) is a commercial finance product offering a path to asset ownership. With HP, you pay a deposit upfront, followed by fixed monthly payments over a set term. Unlike Finance Lease (FL), once all payments and fees are completed, the assets title will pass to your business.
HP may be a more suitable option for those seeking full asset ownership at the end of the agreement, but it is important to note that you do not own the asset until the final payment is made and you have paid the ‘Option to Purchase' fee.
Benefits of Hire Purchase:
✅ Cash Flow: Using funding spreads the cost of ownership over a set period rather than buying in cash. Therefore, this could free up capital within the business to use in other areas.
✅ 100% Funding: The lender may be willing to fund the total amount of the asset’s cost, meaning you don't need to pay a deposit.
✅ VAT Deferral: The lender will fund your VAT allowing the business to reclaim the VAT from HMRC before the repayment to the lender is required. Furthermore, this will be repaid depending on your business's VAT cycle.
✅ Seasonal Payments: Enabling businesses to adjust their payment schedules in line with seasonal trading cycles. This approach helps ease cash flow during slower periods by lowering monthly payments and reducing financial pressure. In turn, monthly payments increase during busier trading months.
✅ Balloon Payment: The deferred capital payment, also known as the balloon payment, can often be a useful product feature as this reduces your monthly cash flow commitments. The final lump sum payment, which usually represents the future value of the asset, can be settled by either refinancing, selling the asset or paying this off in full.
Drawbacks of Hire Purchase:
❎ Higher Monthly Payments: HP tends to have the highest monthly payments compared to other finance and leasing options such as contract hire or operating lease.
❎ Ongoing Fixed Payments: The business is committing to these payments for the full term of the agreement, the asset may be repossessed if you fail to make the agreed monthly payments.
Why Use Charles & Dean?
Using a C&D broker offers several advantages when navigating Commercial Hire Purchase agreements:
Tailored Solutions: We can match you with lenders offering payment options tailored to your needs.
Market Awareness: Our team of brokers understand the current market, securing you the best deal from our panel of lenders, which suits your business’s financial situation.
Competitive Rates: Access to a wide panel of lenders including some of the most competitively priced products in the market.
FAQs
Q: Do I need to put down a deposit?
A: While it’s sometimes possible to secure 100% funding if the lender agrees, it's generally expected that a business will provide a deposit for the asset.
Q: What is the “Option to Purchase” fee?
A: The Option to Purchase (OTP) fee is usually added to your final monthly payment. This is a mandatory fee at the end of your agreement that transfers title from the lender to your business. The cost of this fee changes depending on the lender you are with.
Q: What assets can be financed?
A: Commercial vehicles, agricultural equipment and machinery are just some of the assets we can help with. We can also help with assets like computers, software and commercial furniture.
Q: Is maintenance included in the monthly payment?
A: No, Hire Purchase doesn't consider maintenance, and it will be the responsibility of the business to maintain the asset. However, due to not having to rely on the lender's designated maintenance supplier, you’ll have the flexibility of scheduling maintenance with a supplier that fits your business’ needs.
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