Hire purchase remains “flexible friend” for small businesses

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.

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.

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.”