Hire purchase is a financial arrangement allowing your business to use an asset over a fixed period in return for regular payments. It is otherwise referred to as a lease purchase arrangement.

As a customer you will be able to choose equipment that a finance company will then buy on your behalf. The agreement has value for both parties; the asset will be worth more to you than the finance company could make selling it second-hand.

When all the payments have been made, you become the owner either automatically or on payment of an ‘option to purchase’ fee.

Most equipment in common use in business and industry is available through lease or hire purchase. Examples include plant and machinery, business cars and other commercial vehicles, computers, computer software and other office equipment.

You will need to seek out reputable finance companies that make sure the time for which you need the asset matches the agreed payment period.

What are the benefits?

• Payments are regular and do not demand a huge initial outlay. It will benefit your budgeting and cash flow
  
  
• Most agreements are fixed and will allow you to accrue financial benefits during periods of low, stable or rising interest rates
  
  
• The Inland Revenue will regard you as the owner of the equipment from the start of the contract, allowing you to claim capital allowances.
  
• You can spread the cost and timing of expenditure to coincide with expected future revenue
  
  
• In some situations you can ‘trade in’ old equipment to serve as a deposit on your new HP agreement
  
  
• In most cases you can negotiate the payment terms you want. They can be spread out over the entire period or come in the form of a series of low payments concluded by a large pay-off (sometimes referred to as a ‘balloon’ payment)

Disadvantages

• A fixed agreement is difficult to break without incurring a hefty financial penalty
  
  
• Any fixed HP arrangement will appear costly during periods when interest rates are falling
  
  
• Some HP agreements can carry variable terms linked with current interest rates which can present problems with budgeting and cash flow
  
  
• You are likely to carry the responsibility for insuring and maintaining the equipment