Hire purchase for small businesses

In this article, we'll walk you through the what a hire purchase means for businesses. You can skip to whatever section is most relevant to you by clicking on the links in the left margin.

What is hire purchase?

Hire purchase is where a borrower agrees to purchase an asset over an agreed period of time by paying regular monthly instalments. During this time, you don’t own the asset, but hire it.

At the end of the contract, you’ll usually pay a small fee to secure the asset. Once you’ve paid that, it’s yours.

How do I apply for hire purchase?

The application process is simple. Businesses can apply directly to a finance provider, or hire purchase providers. You can also go to the equipment provider or manufacturer, or apply through a broker.

There aren’t many restrictions on who can take out a hire purchase agreement, either. Though you might need to prove you are capable of making the rental payments and that your business credit score is in a good position.

How does hire purchase work?

We’ve explained the hire purchase definition, but how does it actually work in practice? The first step is normally to put down a deposit on the asset you want to buy. Often this would be 10% or more of the asset’s overall value.

You then pay the rest of the money by making regular, affordable monthly instalments over the next one to five years. Once all the instalments have been made, you pay the final fee. This final fee is usually another percentage of the asset's value.

Example

Hire purchase finance can be used for different assets, such as different types of furniture. One asset it is commonly used for is to buy cars.

Once you’ve chosen the car you want to buy, you would then put down a deposit of 10% or more of the car’s price. You pay monthly instalments for one to five years while you hire the car, usually including interest. Then you’d pay your final fee - known as the 'option to purchase' fee – to own the car.

The advantages of hire purchase

At this point, you’re probably wondering what the hire purchase advantages and disadvantages are. In other words, what are hire purchase problems and solutions? Here are some of the pros for business hire purchase:

• It’s a useful agreement if you can’t afford to make a big payment upfront.
• It’s flexible, straightforward and relatively easy to understand.
• At the end of the contract, you may get to own the asset.
• It’s a fixed rate loan so interest rates tend to be low.
• It could be easier to get than other loans if you have poor credit history, because you hire the asset, rather than buy it outright.

The disadvantages of hire purchase

As with any finance option, hire purchase offers both problems and solutions. Here are some of the disadvantages of hire purchase:

• You don’t own the asset fully until the end of the contract. This means you can’t sell or modify the asset, until you own it.
• If you fail to keep up payments, the financer can take the asset away and your credit record will be affected.
• Monthly payments and interest rates could be higher than for other types of leasing or loans.

Hire purchase vs leasing

A typical hire purchase contract might last one to five years. Compared with lease rental contracts (more on these below), a hire purchase agreement is usually used for cheaper, smaller assets and paid over a shorter period of time.

Why is hire purchase popular?

Hire purchase is one of the most popular forms of finance in the UK, with around a fifth of new vehicles being purchased in this way. It allows small businesses to get vital assets without having to pay large upfront costs.

Because you hire the asset, it can be easier to organise and secure this type of finance than other loans.

What is the difference between lease purchase and hire purchase?

The main difference between hire purchase and leasing is that with a hire purchase you have the chance to own the asset after a period of time. Hire purchase can also cost more each month, because you pay depreciation, tax and interest costs.

You also may need to put down a deposit, which you don’t with a lease agreement. Lease agreements are usually used for bigger assets, like land or property, over longer periods of time. A hire purchase document would normally be used for a smaller, cheaper item and paid over a shorter period.

A finance lease is similar to a hire purchase document, but it differs in some key ways. A lease is basically a rental agreement. As a small business taking out a lease, you would agree a fixed rental period for an asset, such as a piece of land, and then make regular rental payments for the duration of the contract. At the end, you can arrange to lease the asset for longer, or alternatively return or replace it.

Can I get out of a hire purchase agreement?

You can end a hire purchase agreement at any time and this is known as a voluntary termination. You can terminate the agreement in writing and return the asset under the Consumer Credit Act.

This is useful if you can no longer afford the repayments or want to cut costs. You will still have to pay all of your monthly instalments up to this point.

However, in many cases, the lender is entitled to payment of half the cost of the asset. So if you haven’t yet paid half of the overall total cost of asset, you may need to pay this. You will also need to return the asset back in good condition or pay the cost of repairs. It’s a good idea to get the voluntary termination agreement in writing, so the lender can’t claim you defaulted on payments.

What happens at the end of hire purchase?

If you have not chosen to terminate the hire purchase contract early, then you will have the option to purchase the asset at the end of the contract for a small fee. The asset is then yours and you can modify it as you like and are solely responsible for its upkeep and repairs.