Hire Purchase

For plant, equipment and other hard assets, hire purchase generally proves to be the most suitable as the borrower retains ownership of the asset at all times. This represents an obvious risk to the lender, but is always reflected in the cost of finance which is typically the rate of interest on the finance. It is a fixed rate and the term of the contract will be applied to the life of the asset.

Caution should be exercised when considering the cost of early settlement of the loan, but a borrower is in any event obligated to a balloon payment which is a lump sum payable at the termination of the contract to bring the net payment in proportion to the resale price of the asset. This balloon payment is able to be negotiated at the discretion of the lender, and may allow a significant reduction in repayment amounts over the life of the asset; these repayments are able to be negotiated as payable in advance or in arrears. This is always the case but in the United Kingdom this is the most common method of repayment. It's always best to confirm any information with the hire purchase company before the deal is set.

Sometimes, a provider of hire purchase finance will require an initial lump sum deposit to be paid at the onset of the transaction. This is often mistakenly seen as representing the interest component of the transaction with the remaining payments dividing the principal amount, but an inquiry into the cost of early settlement will find that depending on the type of asset, the interest may not have been paid in full. Balancing this obligation is the fact that existing credit lines remain available because the asset appears on the balance sheet of the business as a fixed asset. For many people, this can be quite useful but if you aren't paying attention then payments can sneak up on you and you can end up spending a lot more. This has a favorable influence on the balance sheet and can only support the viability of the business. Of course this has the additional advantage of allowing the business to write down the depreciation of the asset against taxable income each year, along with the interest component of the loan.

In the United Kingdom in hire purchase asset finance, ownership to the asset vests in the borrower, and unlike a lease VAT is not charged on repayments over the life of the asset. So in many ways it can be advisable for a number of different circumstances and for that reason hire purchasing is quite popular.

It is often stated that hire purchase is the most appropriate strategy of asset finance when matched to the life of the asset, but it is rarely the cheapest option. Therefore, the borrower must use initiative in considering alternatives and most importantly the utility that the asset will provide the business, as the benefits the asset brings to the business may well outweigh the cost.

This article was provided by George Acheson - he writes on a variety of subjects including the IVAs process in the UK.