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What is a Hire Purchase Agreement? (2022 Update)

When starting a small business, it is important to have access to convenient and flexible methods of financing or obtaining equipment. For example, a start-up business may require motor equipment or other costly mechanisms for business operations. One possible solution is a hire purchase agreement.

Table of Contents

What is a Hire Purchase Agreement?

Hire purchase agreements enable business owners to hire equipment for a set period of time through installment payments. There is no actual lending or borrowing of funds involved. In this regard, they differ from traditional loans. The hirer does not become the owner rather the agreement is an option to buy the equipment its conclusion. The hirer will assume the role of owner following payment of the final installment.

You can negotiate an agreement with the owner of the equipment or through a financial organisation. The financial organisation, such as a finance company, acts as a third party through which you transfer regular payments to. When entering an agreement, you should get in contact with a business lawyer to assist drafting the agreement’s terms.

Advantages of a Hire Purchase Agreement

There are a variety of benefits for small businesses to enter into these agreements.

Firstly, they provide individuals the ability to buy items which they would otherwise be able to afford. Additionally, it enables the hirer to use the equipment and generate business revenues despite not having paid for it in full.

Secondly, installment payment prices are fixed at the beginning of the agreement. Therefore, hirers can reap the benefit of a fixed interest rate. Additionally, there may be long-term tax benefits of delaying ownership. Furthermore though the Australian Taxation Office, you may be able to claim GST credit for GST included in the purchase price of equipment.

Hence, hire purchase agreements can provide a resourceful, cost-and-time efficient means to small traders and entrepreneurs. The possession of equipment without added financial pressure can thereby be effectively promoted.

Possible Complications?

In the event of administrative complexities and/or financial difficulties, the owner may repossess the equipment and you will not be compensated. This will be an issue particularly in situations where the time-frame for payments spans widely. However, this can be alleviated when drafting the agreement, to ensure that commencing instalments are smaller than “catch-up” payments towards the end of the contract.

Hirers should be cautious and avoid entering into agreements for unnecessary equipment, as sometimes, the convenience of them leads to artificial demand for products. Again, the core of saving costs should be at the forefront of agreement-making decisions.

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