
Hire purchase is a type of asset finance that helps businesses to acquire equipment, machinery and vehicles to support their day-to-day operations.
Funding capital expenditure through a hire purchase agreement can help a business to preserve cash and/or invest in key assets which might otherwise be unaffordable.
Asset finance (including hire purchase) is the third most popular form of business funding in the UK - behind only bank overdrafts and loans - in terms of usage.
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A hire purchase facility allows a borrower to purchase an asset(s) using third party finance, typically through a commercial lender. The borrower will own the item at the end of the contract. Usually, there is a small fee at the end of the contract to secure title to the asset.
Using HP, businesses can purchase crucial assets without large upfront costs in exchange for fixed repayments over an agreed term.
In most cases a lender will require a deposit which is typically between 10%-20% of the purchase price, plus VAT - In some cases, for a strong credit profile, a lender may agree to a VAT only deposit.
As opposed to leasing where the VAT is charged against monthly rentals, the VAT is payable upfront with HP.
Who is eligible for Hire Purchase?
Generally, most businesses can apply for hire purchase to fund a wide range of equipment including traditional 'hard' assets, such as commercial vehicles and production kit, or 'soft' assets, such as fixtures and fittings.
A key factor in obtaining credit approval is demonstrating a borrower's ability to 'service' the proposed debt repayments. A full credit assessment will be undertaken to understand whether profitability and/or cash generation, are sufficient to cover the proposed repayments.
Lenders may also consider the additional revenues an asset may generate for the business and the impact that will have on the overall ability to make repayments.
Another important factor is the borrower's credit rating - A poor or weak rating could reduce your ability to obtain funding.
How does one apply for HP?
The application process is generally quick and straightforward, especially for common equipment such as vehicles.
Businesses can apply directly with a lender, via some equipment suppliers or through a reputable commercial finance broker.
Annual Investment Allowance 'AIA'
Under the Annual Investment Allowance, a business can deduct the full cost of assets from their profits before tax. The AIA limit will remain at £1,000,000 until 1st January 2022 with most assets acquired under a hire purchase agreement eligible for AIA tax relief.
We took a deeper look at the AIA in one of our previous Insights. You can check it out here.
Like to know more?
Get in touch with the team at KeySME today - We can talk you through your options, the benefits of hire purchase and most importantly . . . how this type of funding can boost your business!
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