Asset Finance vs Hire Purchase

Businesses looking to grow and scale have a number of financing options available to ensure access to working capital. Whilst you may be familiar with some of these instruments and methods, others may be less understood. Asset finance and hire purchase are two financial terms that, while recognisable, could be confusing as to what exactly they mean. 

What are asset finance and hire purchase?

The common application and use of the term asset finance refers to the utilisation of a company’s assets (as listed on their balance sheet) as a security or collateral for a financial loan. 

However, this is distinct from the ‘asset finance’ used in the context of hire purchasing or leasing. This finance for assets is a type of funding method businesses use to acquire the equipment, machery or other assets they need to grow the company. 

The most common structure of asset finance in this instance is the paying of regular installments for an asset over a set term, rather than the purchasing of the asset at full cost from the outset. 

Understanding Asset Finance

We know that this can be confusing. So, let’s break down asset finance a little more.

Businesses normally use asset finance as a way to more economically acquire the asset they need without needing to pay its entire cost upfront. The two most common ways asset finance is provided are:

1. Hire purchase
2. Leasing (sometimes referred to as operating leases)

Much like business or even personal loans, the use of asset finance allows for businesses to make larger purchases and pay them off over time. 

Why Use Asset Finance?

If your company needs to acquire a significantly priced asset, such as a truck, a ship or even IT equipment, but doesn’t have access to the necessary working capital, asset finance can help.

Without costing too much and without needing too much of an investment upfront and outright, it can be a practical solution for small-to-medium sized businesses and growing organisations.

Hire Purchase: what is it?

How does a hire purchase work?

Hire purchase–one of the more common forms of asset finance–enables businesses to purchase the asset or equipment on credit. In this arrangement, the asset is owned by the finance company throughout the duration of the term. Once the term is over and the installments have all been paid, the hirer can then exercise the option and buy the asset for a specific, nominal amount.  

Leasing

Hire purchase differs from leasing in that a leasing arrangement involves the business paying to rent the asset for the period of the contract with no option of purchase or ownership at the end. The finance company stills purchases the asset on the business’s behalf, but there is no agreement beyond the pre-arranged lease term. 

What to consider with a hire purchase

If you’re considering hire purchase as your financing option, there are a few things to take into consideration in relation to your specific needs and situation.

Understanding the principal amount and interest

As the hirer, you will still be paying for the total amount of the asset. The key factor here is that the amount will be paid in regular installments over the course of the contract’s term rather than all at the start as would be necessary if you were purchasing the asset outright. This is the principal amount.

In addition to the principal, your business will also pay interest as outlined in the original agreement. 

Option to own

The significant difference between a hire purchase and lease agreement is the transfer of ownership from the finance company to the purchaser at the end of the term and after the last installment. 

However, this is only an option. Prior to ownership being transferred the purchaser is able to terminate the agreement. If the option to transfer ownership is realised, this can only take place after the last agreed installment has been made. 

Hire purchase agreement’s relationships

In the hire purchase contract, the relationships between the finance company and the purchasers is considered as a vendor or owner and hirer respectively. 

Term

Compared to a leasing agreement, hire purchases’ terms are generally shorter. Make sure to understand the length of the term in your agreement and the associated cost of instalments plus interest. 

Asset depreciation

Assets subject to depreciation and thus the depreciation benefit for tax purposes is attributed to the hire purchaser in such an agreement. 

Default possession

If you default on your regular installment payments, the current owner of the asset–i.e., the finance company–can seize possession of the asset permanently. 

Associated costs

If the asset is subject to repairs or ongoing maintenance costs, it is the hirer who bears the costs.

Should you finance your assets through hire purchase?

There are pros and cons to hire purchases.

Some of the advantages include the certainty around the fixed amounts of the repayments, and the negotiable nature of many of the terms from the outset. The flexibility of being able to choose the ‘buy out’ ownership of the asset at the end of the agreement or not is certainly an attractive benefit too. 

However, hire purchases–subject to the interest rate and other conditions–can be a comparatively expensive form of asset finance. Many finance companies will require a deposit as well, so there may well be some form of an initial outlay of costs. 

At the end of the day, every business will need to consider their own needs and situation before deciding what the right form of asset finance is for them. 

Contact ScotPac for tailored advice!

If you are interested in getting professional and tailored advice, make sure to contact the ScotPac team today on 1300 207 166 between 9am and 5pm Australian Eastern Daylight Time, Monday to Friday.