Hire purchase (HP) is a common and readily available method of finance that offers businesses the opportunity to obtain items such as cars, office furniture or computers without having to purchase the item outright "up front". You source the asset and negotiate the purchase price. The hire purchase provider will pay for the item on your behalf and charge you an initial deposit. Ongoing monthly instalments will be calculated based on the size of the deposit you paid, the interest charged and the length of the agreement. The projected future re-sale value of the asset is also considered when calculating repayments. Hire purchase can be arranged on either fixed or variable interest rate. Obviously the easiest way to reduce the monthly instalments is to pay a larger deposit and/or the inclusion of a final "balloon" payment.

You will also have to pay a documentation or administration fee and the full purchase VAT which depending on your VAT eligibility can be recovered.

Once the balance of the item plus interest has been paid off you may exercise the option to buy the goods from the finance company, usually at a nominal final fee. Alternatively goods can be returned to the finance company. You will not own the item until that last instalment and final payment has been made. It's always worth double checking what the final fee will be otherwise it may come as a nasty surprise.

There is also the option called lease purchase which is exactly the same as hire purchase only your initial deposit is replaced by a multiple of the repayments, typically three months up front.

Ideal for
Businesses looking to expand that need to purchase expensive capital assets in order to do so. Hire Purchase allows the business to obtain the asset with minimal initial payment.

Security required
The item being bought will act as security and can be repossessed should you default on the hire purchase agreement.

Advantages

• Offers businesses a way of spreading the cost of capital purchases over time.
• Allows purchases without a loan or negatively impacting cash flow.
• Security is usually taken over the asset alone - no need to disrupt bank security arrangements.