Hire Purchase. 

Hire purchase is where a business “the hirer” agrees to purchase an asset over an agreed period by way of regular monthly payments. 

Hire Purchase. 

Hire Purchase. 

Hire purchase is where a business “the hirer” agrees to purchase an asset over an agreed period by way of regular monthly payments. 

Overview 

A Hire Purchase agreement is a popular alternative to Finance Lease for many businesses throughout the UK. 
 
Unlike a Finance Lease agreement, with Hire Purchase all the VAT is paid upfront and recovered in the normal way. 
 
The asset is shown on the balance sheet. 
 
In addition to being able to claim back up to 100% of the VAT at the beginning of the agreement, the monthly payments will be shown as a reduction of liability and capital allowances can be claimed in the usual way. 

Key Benefits 

Fixed payments for the entire period 
The VAT paid upfront is recoverable in the normal way if the hirer is VAT registered 
Asset appears on balance sheet 
Capital allowances and depreciation is claimed in the appropriate way 
No excess mileage charges 
Ownership at the end of the period 

Hire Purchase meaning? 

Hire purchase is where a business “the hirer” agrees to purchase an asset over an agreed period by way of regular monthly payments. Throughout the term, normally 3 - 5 years, the hirer doesn’t own the asset until the agreement has completed and the option to purchase fee is paid. However, the hirer has full use of it and is also responsible for the full repairs and maintenance. 
 
Typical hire purchase deals would consist of an initial upfront payment or deposit, this can be anything from VAT only, to any percentage of the asking price. A higher deposit would reduce the monthly payments, whereas a lower or VAT only deposit would mean higher monthly payments. 
 
The agreement is for a fixed term, and the monthly payments are fixed. This helps the hirer to accurately forecast their cashflow. 
 
Selling the asset during the fixed term is allowed with the permission of the lender. The hirer would request a settlement figure and clear the outstanding balance from their own cash resources or perhaps by selling or part exchanging the asset. 
 
At the end of the term, a small option to purchase fee is paid and title of the asset passes from the finance company or lender to the hirer. 

Hire Purchase Case Study 

A hire purchase agreement is common way for businesses to purchase assets over a period of time without having to pay the full asking price upfront. In this example we will share a recent Hire Purchase deal for a haulage company on contract with a supermarket chain. 
 
Their contract is to transport dry goods from delivery hubs located around the UK to supermarkets. This work requires the truck to be running 24 hours which as a result means it covers a considerable amount of kilometres, and may be for contract hire. 
 
The customer who wanted to keep as much working capital as possible in his business. Therefore, we suggested a 10% deposit with a 3 month VAT deferral on a Hire Purchase agreement. After agreeing a deal with a supplier of a 2 year old Volvo tractor unit, the customer asked if we could assist with the purchase. 
 
As an existing customer, we already had full background information on file. We confirmed everything was still the same over the phone, and confirmed it was ok to carry out new credit searches on all directors and major shareholders. 
As normal, we asked for 3 months business bank statements, a copy of their recent filed accounts and details of the truck and supplier. 
 
We identified a lender thought to be most suitable for this deal. It was discussed with the customer and an initial indication of likely monthly rentals was given. 
 
A proposal was written and sent to the chosen lender together with financials and asset details. An acceptance was issued within 24 hours by the lender and we arranged the invoice from the supplying dealer. 
 
The invoice came by email which gave us the information we needed to generate the hire purchase documents. As these documents were being posted to the customer, we indicated where to sign and enclosed a letter explaining what to do with he documents. We also included a stamped, addressed envelope for the customer to return the signed documents to us. 
 
Once the documents were received, they were sent via email to the lender with a copy of the invoice and any other information they requested on the acceptance. 
 
The paperwork was processed by the lender and the supplier was paid out the same day. The customer then contacted the dealer to arrange collection of his tractor unit. 

Hire Purchase vs Lease? 

The choice between Hire Purchase or Finance Lease for most limited companies, partnerships and sole traders is normally dependent on financials and accounting. 
 
Hire Purchase normally requires the full VAT amount to be paid upfront, with the agreed deposit. That said, there are now options to defer the VAT to the 2nd, 3rd or 4th monthly rental. 
 
For more information on how we can assist arranging a hire purchase agreement with a VAT deferral, please contact us. 
 
Hire Purchase  
Finance Lease 
Will I own the asset? 
Yes, once the option to purchase fee is paid, title of the asset transfers to the borrower 
No. However you can continue to lease the asset for an annual "peppercorn" rental. You will also have up to 99% interest in the asset. 
What initial payment is required? 
All the VAT + a percentage of the purchase price. 
Normally a 10% + VAT on the 10% is required. But this can vary, depending on the deal. 
What term can the agreement be taken over? 
Anything between 2 and 7 years, depending on the terms set our by the lenders. 
Up to 5 years for the primary rental period. The secondary rental period can extend to the life of the asset. 
Will my payments change? 
No, the payment is fixed for the duration of the agreement. 
No, the payment is fixed for the duration of the agreement. 
What happens at the end of the agreed term? 
After the option to purchase fee has been paid, title of the asset transfers to the borrower who then owns the asset. 
The asset can be sold in which case the lessor will raise the sales invoice and on receipt of cleared funds will refund up to 99% less VAT and any settlement. Or, the asset can run into the secondary rental period for an annual "peppercorn" rental 

Frequently asked questions regarding Hire Purchase 

Q - Will I own the asset at the end of the primary period? 
A - Yes, once the option to purchase fee has been paid, title of the asset passes to the borrower. 
Q - What will I have to pay upfront? 
A - This depends on the asset. Generally a percentage of the purchase price, plus all the VAT. 
Q - How long is the agreement for? 
A - The fixed term agreement can be anything from 2 to 5 years. 
The hire purchase definition is “a system by which one pays for a thing in regular instalments while having the use of it” 

Hire Purchase advantages and disadvantages: 

Advantages 

The cost of high ticket items can be spread over a number of years. 
 
The hirer will take ownership of the asset after paying the option to purchase fee. 
 
The hirer has full use of the asset. However, responsibility for the repairs and maintenance is with the hirer. 
 
It is a fixed rate agreement, the monthly payments will not change. 

Disadvantages 

Hire purchase agreements are fixed. If you are unable to maintain the monthly repayments you may lose the asset and this could have a detrimental affect on credit ratings. 
 
The interest applied to the hire purchase agreement means you will pay more for an asset over paying for it outright. 
 
Until the option to purchase fee is paid at the end of the agreement, title of the asset remains with the lender. 
 
In addition to the interest applied, there is normally an additional document or admin fee applied to the first monthly payment. 
 
 

If you would like to discuss Hire Purchase, call Lease Finance Limited on 01939 291323 or contact us by email. 

Lease Finance Limited is a Broker and not a Lender 
 
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