Simply spread the cost of your equipment over a fixed period at a fixed or variable rate. Great for cash flow and great for budgeting.
The hire purchase agreement was developed in the United Kingdom in the 19th century with the main principles still going strong now. You pay a low deposit and decide on the term which gives you the flexibility of the repayment period being matched to the useful life of the equipment. You have a fixed monthly payment and you own the asset at the end of the agreement, which makes budgeting and cash flow easier to maintain.
If cash flow is a priority for the company paying a deposit along with the VAT upfront can be difficult. Leasing allows businesses to upgrade assets more frequently ensuring they have the latest equipment without having to make further capital outlays. You pay VAT on the rental payments, not the purchase price. You can also normally offset your payments against your taxable profits (please consult your accountant for this).
When the agreement ends the equipment is sold and the funder will pay a set percentage of the sale proceeds back to you. This is usually between 90 & 97.5%
ere are several reasons why Contract Hire & Operating Lease work well for certain companies. If the equipment been purchased is purely for business use you can claim 100% of the VAT back. Contract Hire can also include a maintenance package which again you can claim 100% of the VAT for.
As with a HP deal you have fixed monthly rentals which allows for simple budgeting but you have no depreciation risk as the agreement is purely rental so it is not on your balance sheet. This means your gearing will not be affected and you do not have to worry about a re-sale value at the end of the agreement as you hand the equipment back.