When purchasing fixed assets there are alternatives to bank funding. Some of them offer a number of benefits over a conventional loan.In this chapter, three things that really matter:In Chapter 1 we looked at the importance of gaining the right mix of funding.
When purchasing fixed assets your options are greatly increased. There are a number of finance companies in the funding market that specialise in asset finance. In many ways, this sort of finance is easier to obtain than bank funding. This is because the asset that you are purchasing can effectively be used as security for the debt. This can be both an advantage and a disadvantage.
If you are winding up your business on a voluntary basis it gives you the option of returning the item as being no longer required. If, on the other hand, you are experiencing financial difficulty, the removal of the asset could bring about the downfall of your business.
As a prime example, consider a new start-up sole trader in business as a taxi driver. Funding the vehicle on hire purchase or leasing would probably be one option. Stop making the payments, however, and the prime asset of the business, absolutely essential to keep the business running, could be repossessed. This would inevitably lead to total failure of the business.
Is This You?
Hire purchase is the cheapest option, I can easily get one of those interest free deals. • Lease purchase is just the same as leasing, isn’t it? • Leasing is no good to me, I’ll never own the asset. • Why should I even think
about using a building society, they only lend to people who want to buy a house.
Using Hire Purchase
Hire purchase can be a very easy financing option. It is also sometimes referred to as lease purchase although it is not the same as leasing. You only have to walk down your local high street to see the range of hire purchase schemes that are available, some more expensive than others. Hire purchase is an agreement to buy an asset, for example, a motor vehicle or computer equipment, with defined repayments over an agreed term. Depending upon the agreement, ownership of the asset may, or may not, pass to you immediately. Some agreements, for obvious reasons, do not allow ownership until all instalments have been paid.
In accounting terms, however, the asset is treated as yours and as such it will appear in your balance sheet. This can mean that capital allowances and the interest portion of the repayment are available to offset
taxation. You will need to seek specialist advice on this aspect from your accountant.
*The disadvantages of hire purchase are the same as if you bought the asset outright. If it breaks down, unless it is under guarantee, you will be responsible for the repairs.
- ˜ If, for example, you buy a motor vehicle on hire purchase, you are responsible for the costs of maintenance.
Breaking the agreement by returning the asset early voluntarily can also involve penalties. The hire purchase agreement is for a defined term and the finance company will price the cost of repayments based on the whole term. Hire purchase can sometimes be cheaper than traditional bank finance. This is often the case where the manufacturer of the product also provides the finance to make a purchase. Hire purchase can also be more expensive.
- ˜ You need to check and compare the APR carefully before you sign the agreement.
This is a very important aspect. Sometimes the ease with which the finance can be gained is not necessarily in your favour. As an example, some of the high street stores offer what seem to be very good financing deals with delayed repayments, sometimes for 12 months. If you look carefully at the agreement, however, you might find that the actual APR equates to around 30% per annum. This is definitely not a good arrangement for you to sign.