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Hire purchase remains “flexible friend” for small businesses

FINANCING your company car through a hire purchase agreement has always been popular with small businesses. Ralph Morton, explains why.
hire purchase for cars is popular with small businesses

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29 March 2016

HIRE PURCHASE – or HP – has always been a favourite method of funding of cars and vans for UK small businesses.

It is a peculiarly British method of finance. It combines the immediate cash-flow benefits of car leasing with the opportunity to buy the vehicle outright for a nominal fee at the end of the agreed term. Hire Purchase suits the British motorists’ preference to have title to their car or van after a period of paying for it.

Hire Purchase in brief

  • Often referred to as HP
  • Purchase a car or van with monthly finance instalments
  • Nominal option to buy the vehicle comes at the end of the agreement
  • You own the car or van at the end of the HP agreement
  • Liked for its flexibility

When Monks Data canvassed a number of small businesses to find out why they had a preference for hire purchasing their vehicles some 67% of responders gave “cost effectiveness” as the main reason. “Ease of administration” came second.

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Less stress on company capital

One lender explained: “Companies’ cashflow benefits from hire purchase since they do not need to use their cash resources to make a capital outlay for the purchase price of the asset up front. As a lender we are usually flexible over the initial deposit we require. Just as importantly, the vehicle can be generating income for the company whilst it is being paid for.”

He added: “There are a number of ways in which small businesses feel they can handle hire purchase better than other finance methods. For a start, they can budget easier since the payments structure is agreed at the outset. Then they can match payments to the depreciation of the vehicle. They can claim immediate capital allowances on the vehicle and the interest element of the payments is tax deductible. Funding is on balance sheet and companies can have a choice of fixed or variable interest rate agreements.”

Colin Tourick,Grant Thornton Professor of Automotive Management at the University of Buckingham and a management consultant added:

“For most people, Hire Purchase is simply a method of buying a vehicle on deferred payment terms. They don’t consider they are hiring something at all. Hence the client is normally called the ‘buyer’ rather than ‘hirer’ and the payments are called ‘instalments’ or ‘payments’ rather than ‘rentals’.

“TheHire Purchase agreement will give you the option to buy the vehicle for a nominal ‘bargain’ amount. Unlike conditional sale, the right to buy is an option and not a contractual obligation. Normally, you will pay the option amount and take title.”

A normal hire purchase payment pattern  will be one payment which is then followed by 35 or 47 equal monthly payments starting one month following the start of the finance agreement.

Flexibility of Hire Purchase appeals

Another main attraction of hire purchase is the flexibility for companies to end their HP agreement early. If this decision is selected, termination can be done simply by advising the finance company in writing and returning the vehicle. The hirer will then normally be liable to pay half the amount due under the agreement, less the payments already made.

Company owner who uses hire purchase to finance company cars

It is this great flexibility of Hire Purchase that has made it popular with point-of-sale finance – such as at car dealers. At the same time many motor dealers are becoming expert at guiding small businesses to select the product that best suits their needs.

Is there a disadvantage to Hire Purchase?

Hire purchase gives you ownership of your business company car which means it’s on your company’s books. But that does mean that when you want to sell, you will be subject to used car price fluctuations at the time of selling.

There are other forms of lower repayments methods that come with a balloon payment element – such as lease purchase, contract purchase and so on – which could help cash flow, and these are not available on Hire Purchase.

But nevertheless, Hire Purchase remains very popular, particularly in the business van market where Hire Purchase allows flexibility on mileage and length of ownership.

And it’s that flexibility that is so valued by small businesses.

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Ralph Morton

Ralph Morton

Ralph Morton is an award-winning journalist and the founder of Business Car Manager (now renamed Business Motoring). Ralph writes extensively about the car and van leasing industry as well as wider fleet and company car issues. A former editor of What Car?, Ralph is a vastly experienced writer and editor and has been writing about the automotive sector for over 35 years.

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