If you’re looking to acquire new assets without the stress of making a big lump sum payment and impacting cash flow, using a hire purchase agreement can help your business. Whether you need new vehicles, machinery or equipment to keep your operations moving, a business hire purchase offers several key benefits. 

We outline what you need to know about these agreements, including how they work, what you need to apply for one and the risks and downsides to consider.

What is a business hire purchase?

A business hire purchase is a way of financing expensive assets by making an initial deposit, followed by regular payments over a set period. During this time, you basically ‘hire’ the asset while paying for it. This allows you to use the asset straight away without paying the full price upfront, and once it’s paid off, you own it outright.

Why do businesses use hire purchase agreements?

The main reason a business might use a hire purchase agreement is to spread the cost of a high-value asset, like a vehicle or piece of equipment, that’s crucial for the company’s operations and success. Paying for this upfront can cause cash flow problems in key periods, so it softens the blow and eases pressure on finances. Also, rather than simply hiring a car or leasing machinery for business purposes, the fact that you’ll own it at the end of the agreement is another perk of the deal.

There are alternatives to using a hire purchase, such as other forms of asset finance or business loans, which allow you to cover the cost of purchasing the asset, rather than hiring it, making monthly repayments plus interest. With iwoca, our flexible business loans align with your cash flow, and you can repay the loan early if your circumstances change at no additional cost. 

How does a hire purchase work for businesses?

In simple terms, a hire purchase involves a business putting down an initial deposit to start hiring an asset, then making a number of monthly repayments to cover the remaining costs, before a final payment to secure ownership of the asset. The deposit is usually around 10% or more of the asset’s overall value. 

You’ll agree to the length of the hire purchase agreement, enabling affordable monthly instalments, usually for one to five years. This final fee is usually another percentage of the asset's value, often referred to as a balloon payment.

What is a balloon payment?

As mentioned, the final payment in a hire purchase is called a balloon payment. This is due to it being a larger sum than the monthly repayments, and covers the remaining value of the asset required for your business to own it.

A large deposit and/or large balloon payment in the agreement can lower your monthly repayments, but you need to ensure you have good cash flow management to account for the final balloon payment when it’s due. 

Can I get out of a business hire purchase agreement early?

You can end a business hire purchase agreement at any time, known as a voluntary termination. You can terminate the agreement in writing and return the asset under the Consumer Credit Act. This is usually when a business can no longer afford the repayments or wants to cut costs. However, you’ll 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. You’ll also need to return the asset 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 is the difference between leasing 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 agreements 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.

A lease is basically a rental agreement, where you agree on a fixed rental period for an asset, and then make regular rental payments for the duration of the contract, after which you can arrange to lease the asset for longer or return or replace it.

Alternative asset finance to hire purchase agreements

A hire purchase is just one type of asset finance. There are several other forms of asset finance, such as:

• Finance leasing – renting an asset for a fixed period, making regular payments, with options to return it at the end of the term or extend the lease.
• Contract hire – a fixed-term hiring agreement ideal for short-term asset requirements, without options for ownership.
• Asset-backed lending – secured loans or finance agreements that use existing assets as collateral to secure financing for purchasing new assets.
• Refinancing – using the value of existing assets to release equity to fund new equipment, or allowing a lender to lease an asset back to you to unlock capital.

Hire purchase vs. finance lease

If you’re choosing between hire purchase and finance lease options, consider the pros and cons of each. With a hire purchase, you get to own the asset outright at the end, but with a finance lease, you have less commitment and the flexibility to choose what to do with the asset once your initial lease is up. Also, if you only need to asset for a short period, it’s worth considering a contract hire. It’s a simpler agreement in which you don’t need to worry about balloon payments, and there’s no option or obligation to own the asset at any point.

When comparing hire purchases, finance leases and contract hire agreements, weigh up these main factors:

• Ownership
• Initial costs
• End-of-term flexibility
• Monthly payments 
• Total cost of ownership
• Assets on your balance sheet
• Short-term vs. long-term asset needs

Learn more in our dedicated article: Finance Lease vs. Hire Purchase: Which Option is Best for Your Business?

Hire purchase example

Let’s consider a hire purchase example to help you understand whether it's a suitable option for your business. 

So, hire purchase finance can be used for various different assets, from furniture and office equipment to machinery for construction and manufacturing. However, a common asset use case for hire purchase agreements is vehicles.

Once you’ve chosen the vehicle you want to buy, you put down a deposit of, say, 10% or more of its price. You pay monthly instalments for a few years while hiring the vehicle, usually including interest. Then you’d pay your final fee, known as the 'option to purchase' fee, to own the vehicle. It’s calculated by taking into account depreciation

Understanding car and van hire purchases and leasing 

When using asset finance options like hire purchase and finance lease agreements to use and acquire vehicles for business, it involves added complexity. There are factors to consider, such as maintenance, servicing, insurance and tax implications/benefits.

With a hire purchase, businesses are typically still responsible for arranging vehicle maintenance, servicing and insurance. In a contract hire, these things can be included and negotiated.

It’s also worth noting how using a hire purchase for business vehicles influences your corporate tax and capital allowances. For example, if your business uses a vehicle hire purchase, it can claim capital allowances, treating the asset as owned. And if using electric vehicles (EVs), you’ll enjoy additional tax relief from the UK government’s green incentives. Interest payments are also tax-deductible.

Find out more about vehicle asset finance in our following handy resources:

• A Guide to the Best Vehicle and Asset Finance Options for UK Businesses
• Business Car Leasing in the UK
• Business Van Leasing: A Comprehensive Guide for UK SMEs
  

The advantages of business hire purchase

Here are some of the advantages of using a 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 a poor credit history, because you hire the asset, rather than buy it outright.

The disadvantages of business hire purchase

As with any finance option, hire purchase agreements have potential downsides to consider. Here are some of the disadvantages of using hire purchase options:

• You don’t own the asset fully until the end of the contract, meaning you can’t sell or modify the asset until you own it.
• If you fail to keep up payments, the finance lender 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.

How do I apply for business hire purchase?

The hire purchase application process is simple. Businesses can apply directly to a finance provider or hire purchase provider. 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 business hire purchase agreement, either. However, you may need to prove you’re capable of making the rental payments and that you have a healthy business credit score.

Like any finance agreement, the lender will assess various suitability and eligibility factors, such as your business type, credit record, funding purpose and how long you’ve been trading, whilst evaluating your financial records and the likelihood of your being able to make the required ongoing payments.

If you think a business loan would be more suitable for your asset finance needs, iwoca offers flexible business loans for SMEs. We help growing companies overcome cash flow challenges and gain access to capital to fund key business purchases. 

You can borrow between £1,000 and £1 million for days, weeks or up to 60 months, and you only pay interest on the funds you use, with flexibility to use capital for other business requirements. Applications take just a matter of minutes, and funding decisions are usually made within 24 hours, with funds transferred on the same day, in most cases.

Find out more about how to get a business loan from iwoca and use our loan calculator to work out your likely monthly repayments.

More business funding alternatives

• Asset finance
• Business crowdfunding
• Peer-to-peer lending
• Franchise finance
• Vendor finance
• Business overdraft

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