Hire purchase gives your company a simple way of spreading the costs of acquiring commercial assets.
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What is hire purchase?
A hire purchase is a way of buying assets, by paying in installments — over a period of time. With most hire purchase agreements, you only own the asset once all the installments have been paid. However, certain agreements have the asset appearing on your balance sheet straightaway.
Hire purchase — considerations
Similar to equipment leasing — a hire purchase is also a form of asset finance. Hire purchase is a simpler concept, where you do not lease or rent the asset — rather you buy and pay for it throughout the agreement term. Hire purchase is not as flexible as an equipment lease (in most cases), but unlike a lease — your business gets to eventually own the asset.
With most agreements a deposit is normally required. The required repayments would cover the value of the asset — plus any fees and interest to be paid to the lender.
Depending on the terms, you may be able to terminate a hire purchase agreement early — which is useful if your business circumstances change and you don’t need the asset anymore.
Hire purchases are becoming increasingly popular in Nigeria, as a convenient and cost-effective way of acquiring valuable assets like — machinery, factory equipment and vehicles.
Other alternatives to hire purchase include a finance lease, where you don’t own the item at the end of the agreement, and operating leases — which gives you more flexibility and free equipment maintenance.
How does hire purchase work?
A business looking to invest in new commercial assets, would approach a hire purchase lender. If the lender agrees to provide financing, you would usually put down a 10-20% deposit — in relation to the assets value.
Depending on how much you can afford, a payment plan is drawn up. According to this payment plan, the balance is then to be paid in regular installments. Once you make the final payment installment — the asset legally becomes yours.
With some lenders, you make relatively low monthly repayments. As a result, these lenders often require a final settlement/completion payment — should you wish to own the asset in the end. This is often referred to as a balloon payment.
Benefits of hire purchase
- Straightforward and easy to understand
- Allows you to invest in the latest equipment
- Useful for those that can’t afford to buy assets outright
- You own the asset at the end of the agreement
- Easier to obtain the financing — as the loan is secured by the asset
Limitations of hire purchase
- You don’t own the asset until the end of the agreement
- Failure to keep up with repayments — may result in the financier seizing the asset
- Interest rates charged are often higher than other forms of finance
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