Hire purchase (HP) is a type of asset finance that allows firms or individuals to possess and control an asset during an agreed term, while paying rent or installments covering depreciation of the asset, and interest to cover capital cost.
Assets are defined as anything of monetary value that is owned by a firm or an individual.
HP is a financing solution suitable for businesses wishing to purchase assets without paying the full value immediately. The customer pays an initial deposit, with the remainder of the balance and interest paid over a period of time. On completion, ownership of the asset transfers to the customer.
The use of HP or leasing is particularly common in industries where expensive machinery is required, such as construction, manufacturing, plant hire, printing, road freight, transport, engineering and professional services but can be used in Nigeria to alleviate, extensively, the challenges faced by small and medium scale businesses.
Waiting till you are able to generate the total cost of the assets you want to purchase may be an uphill task, HP option however brings such effort to fruitfulness immediately. Unfortunately, some Nigerians still believe that they have to wholly finance every deal that will make them owners of one property or the other.
It is either a bank picks up the responsibility to finance the transaction or a finance/lease company does so.
There are two main costs that need to be considered:
· Interest rate charged for financing: Rates are favourable to assets with higher resale value (ie machinery, agricultural equipment, vehicles etc). Assets that are considered 'soft' due to their low resale value (ie printers, vending machines, office furniture etc), will be given less favourable rates
· Fees charged by the financing company for loan processing and administrative work meeting conditions.
Timeframe
An HP or leasing facility can normally take from a week - 3 weeks to process and deliver, depending on the size and complexity of the deal.
Advantages
i. HP or leasing allows companies to control and deploy assets without significant drain on working capital
ii. Fixed-rate funding makes budgeting easy as the lessee has clear sight of future expenditures
iii. Flexibility of repayment structuring is available to allow for seasonal business (eg one repayment a year), and to reduce monthly outlay by factoring in a 'balloon' payment at the end of the term
iv. Leasing prevents the risk of an asset's value depreciating quickly and provides flexibility to enter into a new contract at the end of the original lease's.
Fixed Term
i. Financing asset purchases can be more tax efficient than standard-term loans due to lease payments being booked as expenses
ii. In certain circumstances there is maintenance included within the terms of the agreement.
Disadvantages
Total sum of capital payments for HP or leasing will be higher than the full payment on the asset purchase
Administrative complexity and costs will be greater if any covenants are applied to the arrangement.
If the business changes its strategy, resulting in the leased asset no longer being useful, there can be early termination charges or restrictions on subleasing.
Other options
The right finance for your business section of the site gives examples of financial structures that are suitable for different trading types and sizes of business.
HP or leasing is a medium- to long-term solution to support the use of an asset for a certain period of time. An alternative is a bank loan, which allows firms to purchase an asset and have immediate ownership of it.
Many financing institution do not require collateral from the applicant as the goods in question is automatically converted to collateral.
Where to get one
Micorfinance banks
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