There are numerous ways that you can fund your business. And in this series of blogs, I’m looking at one of the options namely, Asset Finance.
I started the series last week with a general introduction to asset finance and looked at the different types of assets that can be funded and the different type of asset finance options that are available.
This week, and over the coming few weeks, I’m going to look at each option in more detail and examine the ‘pros and cons’ of each one.
We start this week with an old friend: hire purchase.
What is it?
A hire purchase agreement is perhaps the best-known asset finance option. Hire purchase is an excellent option for business owners who do not want to tie up large amounts of capital. Hire purchase allows then to spread the payment over a fixed period of time, whilst at the same time retaining ownership of the asset.
An initial deposit is normally paid at the outset, and the amount of the deposit can vary significantly depending on the type and value of the asset. The outstanding balance, which is the difference between the purchase price of the asset and the initial deposit, is then paid off in monthly instalments over an agreed term which can be anywhere between 1-5 years (most commonly 3 years).
The determination of the monthly instalment is based on the amount of time you would like the hire purchase contract to be over. The duration of the contract can vary to suit the requirements of the business, usually based on the cash flow needs that the business has.
At the end of the contract period, and after all instalments have been made, the hirer can exercise the option to purchase the asset, at which point, full ownership of the asset in question lies with the hirer.
The option to purchase is normally at a nominal fee, which has no bearing on the market value of the goods. This is one of the key differences between hire purchase and contract purchase – which I’ll cover in a future blog.
The interest rate on a hire purchase agreement is normally either fixed or variable, to suit the hirer’s specific needs or preferences.
Pros and cons of a hire purchase contract:
- Regular monthly instalments for the period of the agreement.
- Low deposit.
- Fixed and variable interest rates are usually available to suit your specific needs.
- The hirer can set the interest off against taxable profits and claim capital allowances on the asset.
- The security for the finance is the asset only and not a charge over the business as a whole.
- There is the option for full ownership of the asset at the end of the agreement – this is of course subject to payment of all the instalments due under the agreements and payment of a nominal purchase fee at the end of the agreement.
My Advice – If you want to retain ownership of the asset, then hire purchase is probably your best option.
However, one thing to bear in mind is that as the hirer, you will be responsible for the servicing and maintenance of the asset and all the associated costs that are involved.
Next week we’ll continue the series by taking a detailed look at a finance lease as a funding option.
In the meantime, if you are currently looking to purchase an asset for your business, or you would like to release funds into the business by utilising an asset you already own, then why not talk to an expert. Email us at firstname.lastname@example.org or give us a call on 020 8949 2122 and let’s see how we can help.