Hire purchase in business explained

Financing a business can quickly become expensive, so many business owners understandably turn to lenders to help manage business finances. But before applying for a loan, it's important to research and weigh your options.

Here, we're exploring what hire purchase is, how it can benefit your business and some risks you should consider.

What is hire purchase in business?

Businesses spend a lot of money acquiring assets over a company's lifetime, and costs soon add up, depleting your working capital. But a business hire purchase agreement lets you break down that asset cost over between one and five years. And once you repay the full asset amount, the asset is yours.

Hire purchase is a great way to keep funds in the business while acquiring new machinery, vehicles or computers — whatever you need to buy to help grow your business, all without upfront financial investment.

Advantages of hire purchase

• You're not dipping into cash reserves. Instead, you borrow money to purchase the asset outright and repay the lender in monthly instalments.
• You can maintain a healthy cash flow. What's a business without dependable cash flow? With the help of hire purchase you get to budget for predictable debt repayment.
• You can afford the best of the best. Assets are pricey, but with hire purchase, you can put your business in the best position for growth. With access to the latest models, you can improve operational efficiency or drive change across your organisation quickly.

Disadvantages of hire purchase

• You're taking on debt. Any business loan, including hire purchase, comes with an element of risk. That means if you don't keep up repayments, you can damage your credit score.
• Your asset will depreciate. Inevitably, over time, the asset you're repaying will lose its value, which means after you've spent five years paying it off, you might find it's already outdated, and you have to start the process again.
• You have to maintain the asset. Even though it isn't technically yours until you repay every penny, you still have to pay maintenance fees.

Am I eligible for hire purchase?

If you meet the basic criteria below, there's a good chance you can apply for hire purchase:

• You're a UK-registered business
• A good business credit score
• You're over the age of 18

What happens if you don't have good credit? Don't panic, having poor credit history doesn't mean you can't apply, hire purchase is asset-based, so credit history isn’t usually the deciding factor. Many lenders make their decisions on a case by case basis, and if they do require good credit, they can request a personal guarantee to help lessen your risk as a borrower.

Alternatively, you can apply for a bad credit loan. These are designed specifically for borrowers with less than perfect credit.

How to apply for hire purchase

Applying for hire purchase is straightforward. Use our free loan comparison tool to find and compare eligible lenders before making your decision.

All you need to get a quote is:

• How much you want to borrow
• The period you want to borrow over
• The reason you need finance

You're under no obligation to accept any quote, and this process doesn't affect your credit score.

Business contract hire vs hire purchase

The main difference between business contract hire and hire purchase is the ownership. With business contract hire the borrower pays monthly instalments to rent the asset i.e. a commercial vehicle. In this case, the business doesn’t own the vehicle. But, with hire purchase, the borrower pays an initial deposit, followed by monthly instalments and then they have the option to purchase the asset.

Alternatives to hire purchase

If, after weighing the pros and cons, you think hire purchase isn’t the right financial decision for you, there are plenty of alternatives. We work with various UK lenders to provide you with a range of financial solutions, from automotive business loans (perfect for purchasing your new business vehicle) to lines of credit.

Finance can be accessed quickly, particularly if you apply for an unsecured loan. Some lenders can deposit the funds in as little as 48 hours. Compare business loans.