5 Reasons to Consider a Hire Purchase for Your Business
- December 21, 2022
- by Michael
If you have a comprehensive business plan but lack the finances to acquire high-quality equipment to execute it, opting for a hire purchase scheme can be a solid solution. A hire purchase (term used in Australia) is very similar to the way rent-to-own works in the US.
Hire purchasing (aka rent-to-own) is a form of financing that allows you to rent equipment over a fixed period and then own it once the payment terms are fulfilled.
Unlike an installment plan, the ownership of assets is transferred to you only after full payment has been made; you don't hold ownership over the item once you're still in the process of paying.
Legally and contractually speaking, you are essentially renting the asset from the lender until all the payments have been fulfilled.
This type of financing has several advantages that can benefit all business types, regardless of whether you’re a start-up or an established business.
Without further ado, here are five key reasons why you should consider a hire purchase for your business.
1. Flexible Payment Options
Unlike other financing options where payment plans are arranged beforehand and fixed, hire purchase allows businesses to pay marginal amounts on an interval basis.
For instance, it's not uncommon for a business to pay weekly, fortnightly, or monthly under a hire purchase scheme. This flexibility makes it easier to manage a business's cash flow without significantly draining the business's funds due to a one-off purchase.
Early-stage businesses, in particular, benefit greatly from this scheme due to the low initial investment. This allows them to save funds for operations and other costs while simultaneously helping them utilize their acquired asset to potentially perform profit-generating activities near-immediately.
2. Fixed Interest Rates
Another perk of hire purchase financing is that interest rates remain the same throughout the lending period. This grants businesses the peace of mind of knowing that there won't be any excessive financial burden from hidden repayment-related changes.
Besides that, there are other advantages to having fixed interest rates. For one, it allows businesses to plan their expenditure in advance and accurately budget for the duration of the hire purchase period.
On top of that, the interest rate implemented in this scheme is often significantly lower than other forms of financing, namely overdrafts and credit cards. This helps your business save more money in the long run.
That said, certain hire purchase agreements will have different terms, so be sure to get a good understanding of the contractual agreement before signing.
3. Access To High-Quality Equipment
Savvy entrepreneurs know how to leverage assets that can give their business the boost it needs to succeed. And by hire purchasing, you get to gain access to high-quality tools that can help accelerate your business growth and have it take off with immediacy.
Moreover, depending on who you're getting the equipment from, you may even receive technical support and maintenance services as part of the contractual agreement.
For instance, some car dealers may include free inspections and car servicing for the duration of the contract. Another example would be a leasing company providing after-sales services for printing equipment or computer systems.
Through hire purchasing, you'll get the best of both worlds: a high-grade tool that's primed for production and the assurance of continuous maintenance from the lender.
4. Ownership Will Be Transferred To You
Another great aspect of hire purchasing for your business is that you get to gain full ownership of the asset once all payments have been fully paid.
In other words, unlike undergoing a lease agreement—which requires you to return the asset once the lease period expires—hire purchase allows you to keep whatever assets that you've acquired.
Read: 'Car Lease vs. Hire Purchase: What's the Difference?' by Westpac.
The question then lies, "if my business has the funds to purchase the asset outright, is there any benefit of considering a hire purchase?"
Although it can be tempting to purchase equipment and have full ownership right away, this often comes with high running costs associated with depreciation and additional taxation. This can create a significant financial burden for businesses in the long run.
Hire purchasing, on the other hand, allows businesses to acquire business-critical assets over time, allowing businesses to get a solid foothold in the industry first before eventually realizing ownership.
5. Short-Term Operations Aren't Adversely Affected
Your business should ideally be in continuous motion, with no major disruption to operations.
By opting for a one-off purchase, businesses with tight cash flows can become strapped for cash at the moment of the purchase.
This can result in a cascade of consequences, forcing you to acquire more capital from banks to pay off monthly operational and labor costs. You would also consequently be burdened with accompanying higher interest rates from the loan.
Even if your business is doing well financially, a one-time asset purchase comes with the cost of forgoing potential returns from other investments due to the funds being used for the purchase.
Hire purchase, on the other hand, allows businesses to free up their cash flow and have some capital stocked up for other opportunities. This, in turn, can help business owners rapidly expand without overly relying on their newly-acquired assets.