The advantages and disadvantages of hire purchase finance
04/09/2019 / Comments 0
An essential component for growth is access to the right equipment, and many businesses turn to hire purchase to finance this equipment.
All methods of financing come with different advantages and disadvantages that need to be carefully considered to make the right choice for your business.
If you’re considering hire purchase as a way to finance new equipment, take a look through the pros and cons here to help you make your decision.
Advantages of Hire Purchase
Hire purchase finance is designed to help businesses find new ways to grow, expand and operate efficiently, by providing them with the means to buy new equipment without having to wave goodbye to a lump sum of cash.
Here are some of the key advantages of choosing to go down the route of hire purchase financing.
Kind to your cashflow
Anyone who has spent a lot of time focused on maintaining a healthy cashflow will know that suddenly having to fork out big chunks of money can cause a host of problems down the line.
With hire purchase finance, you’ll pay a set amount each month, over a period of time that works for you and your budget, which should make your financial forecasting much simpler.
Access high-spec Assets
When paying out of your own pocket, you’ll be limited by how much you can afford to (and are willing to) spend.
Choosing hire purchase finance has the advantage of making it realistic to afford higher spec tools and equipment, which could make work easier, give you a competitive edge and have more financial benefits in the long run.
Lower interest than other funding options
One concern some companies have when they look into funding is how interest rates will affect them. With hire purchase agreements, interest is fixed for the duration of the repayment term, and often works out lower than options such as an overdraft or bank loan.
It is possible to claim capital allowances against tax
When your business buys new assets, claiming capital allowances means that you can subtract some or all of the value of the item from your profits before you pay tax, saving you money on your tax bill.
With a hire purchase arrangement, you are able to claim this tax relief on commencement of the hire purchase agreement.
Own the asset after the last installment
One advantage of hire purchase over lease based asset options is that after the last installment, you own the equipment. This can make hire purchase more attractive depending on what the equipment is, how it will be used in your organisation and how quickly it will depreciate.
Disadvantages of Hire Purchase
Finding the right funding to buy equipment is all about reviewing all the options, as every business case is unique.
There are several reasons why hire purchase may not be right for your business, however there are plenty of alternatives that could prove a better fit.
Committing to ongoing fixed payments
While spreading the cost of an expensive asset is in most situations a benefit, you have to be willing to commit to the payments for the duration of the term.
Should you face future financial difficulty or be unable to pay for any reason, the lending facility could be within their rights to seize the asset.
Although this may be daunting, it shouldn’t be a reason to discount hire purchase as an option, as the best solution is careful financial planning and management of your cash flow.
Higher cost overall
One disadvantage that many people associate with financing solutions such as hire purchase is that overall you will end up paying a higher fee for the same equipment.
While this is technically true, you shouldn’t lose sight of the fact that cash flow is a higher priority in the long term if you want your business to be stable.
The extra you pay in order to spread out payments should be viewed as the fee necessary to protect your cash flow.
In some circumstances, the asset you have bought may have depreciated to such a degree that by the time of the final payment, when it officially becomes yours, it is worth next to nothing and may need to be replaced.
As mentioned, all circumstances are different, and its important to research how your asset will depreciate before making a decision. With assets that lose value quickly, a finance lease may be a better option.
Still confused about the best way to fund your new equipment? Our team can talk you through the advantages and disadvantages of different options and how they apply to your specific circumstances. Just give our team a call on 0800 9774833 or request a call back at a time that suits you.