Hire purchase: definition
Hire purchase is a way to buy assets by paying in instalments over time. With hire purchase, you legally own the item once all the installments have been paid, but in certain agreements it will appear on your balance sheet at the start of the term.
Hire purchase explained
Hire purchase is a type of asset finance. It's similar to equipment leasing, but simpler (and perhaps less flexible) overall.
Rather than renting an asset, hire purchase is like making a purchase and paying in instalments, like a private customer might do for a car. Normally a 10% deposit and all the VAT is paid upfront.
Unlike leasing, with hire purchase your business owns the item, but that means there are a few other things you need to consider:
Hire purchase: considerations
First, will your business need the item for the foreseeable future? If the answer is yes, hire purchase could be a good fit. But if you only need it for a short time or you’re not sure, leasing might be a less risky route to take.
Second, will the asset hold its value? Depreciating items are usually leased rather than purchased — but relating to the first point above, if your business needs it for the long term that could be less important.
Finally, you should assess whether there will be an updated version of the asset in the near future. For example, in manufacturing, having state-of-the-art equipment is a significant advantage — while having the latest model of van might not be so crucial to your business.
Alternatives to hire purchase
If you need equipment finance, hire purchase isn't your only option. You might also look into a finance lease, which is a similar long-term commitment but you won't own the item at the end of term. On the other hand, for more flexibility, operating leases are a popular choice, because you can often get regular upgrades and maintenance included.