Hire Purchase Finance
Hire Purchase means that Title of Ownership passes to the company at the end of the agreed term. Organisations can secure an item of plant or machinery required for their business by sourcing the asset themselves, and agreeing the price with the supplier. Once asset finance has been agreed, the supplier will provide an invoice to the funder, describing the asset in full detail, and showing the hirers details as the delivery address.
The funder will discuss and agree terms with the hirer, on what deposit is required upfront, what the repayment period will be, and what the monthly repayment will be. The funder will confirm if the interest rate is fixed or variable.
The Deposit will normally be the VAT element on the cost of the purchase, along with 10% to 20% of the net price.
If variable rate interest applies, the interest charge may become payable at different intervals e.g. quarterly or annually, and just the capital element repaid monthly. This can be more attractive when the bank base rate is high, in the hope that it may get reduced. However, when the bank interest rate is low, fixed rate terms are generally preferred.
If the interest rate is fixed, you have the benefit of knowing what the monthly repayment cost is going to be over the agreed term, making it easier to budget. The total interest charge is shown on the document as well as the purchase price of the goods, along with any other additional fees and therefore the whole transaction is transparent.
Generally the hirer will ask for terms to be quoted with possibly a couple of options, i.e. a two year payback and a three year payback. Depending on the security and value of the asset, this MAY determine the period the funder is willing to offer. If the asset has a long life expectancy e.g. a crane, then the period offered may be longer than that of something such as computer equipment, that would lose its value more rapidly.
Repayments generally commence one month after the agreement has become ‘live’, which is normally taken from the date the monies have been released.
Two types of fees are usually added to a Hire Purchase Agreement. One of these is a ‘Documentation Fee’ – the amount varies with each funder but typically would be around £300 or on a percentage of the agreed advance. The Documentation Fee is paid with the first monthly repayment. The other is called an ‘Option to Purchase Fee’. This again differs in amount from funder to funder, but is generally the same amount as the documentation fee. The Option to Purchase Fee is added to the final rental at the end of the agreement, and upon receipt to the funder of this final amount, title of the asset transfers to the company.
Advantages of Hire Purchase
As well as Title of the Asset passing on completion of the agreement, Hire Purchase agreements offer benefits through Tax Relief on Capital Purchases. They are a good option if cashflow is strong (as the VAT element of the cost of the purchase price also has to be paid), Regular monthly payments makes it easier to budget and forecast, and the VAT element can be re-claimed on the cost of the asset.