Hire purchase explained

What is hire purchase?

A hire purchase agreement is a type of asset finance. It involves a lender buying the asset on behalf of your business. You then repay the cost of the asset in monthly instalments over an agreed term, typically between 1-5 years. The payments are calculated based on the asset’s price, interest rates, and sometimes its projected future value.

Once the final payment is made, you can choose to take full ownership of the asset, return it to the lender, or in some cases, sell it and receive a rebate depending on the final sale price.

This flexible financing solution allows you to invest in your business without needing to pay the full amount upfront, keeping your cash flow healthy and manageable.

Hire purchase agreements are secured loans.

How does hire purchase work?

Here’s a step-by-step for how hire purchase works:

1. You select the asset you want for your business, which can range from machinery, vehicles, or office equipment.

2. Apply for hire purchase from your Capitalise account. We’ll match you with the lenders most suited to your needs. If you’re looking for a vehicle, you can use your Capitalise account to search the registration and receive several finance offers showing potential monthly costs. 

3. If approved, you’ll receive the terms of the hire purchase agreement, such as how long the term will be and how much interest you’ll pay. 

4. You’ll pay an initial deposit to the lender, typically ranging from 10% to 20% of the asset's value.

5. The remaining balance, plus interest, is paid through fixed monthly instalments over the agreed-upon term.

6. Upon completion of all payments, ownership of the asset is transferred to your business.

What assets can you finance through hire purchase?

Hire purchase can be used to finance a wide range of business assets, including:

Vehicles

• Vans: perfect for logistics, deliveries, and transportation services.

• Cars: ideal for sales teams, executive transportation, or general business use.

• Electric vehicles (EVs): with the UK’s Net Zero target by 2050, many businesses are choosing electric vehicles. Hire purchase helps you transition to an electric fleet while managing costs.

Plant & machinery

• For industries like manufacturing and construction, hire purchase allows you to spread the cost of expensive machinery.

Office equipment

• From computers to office furniture, hire purchase lets you equip your workspace without a significant upfront investment.

A hire purchase example

Imagine you're looking to acquire a new delivery van for your expanding catering business. Here’s how a typical hire purchase agreement might unfold, broken down into simple steps:

1. Choosing your asset
You decide on a van that costs £20,000. It’s the perfect fit for delivering your goods efficiently.

2. Searching for finance
Using your Capitalise for Business account, you search the vehicle registration and receive several finance offers showing potential monthly costs.

3. Applying for hire purchase
You choose the best finance offer and apply for a hire purchase agreement with the lender.
The lender assesses the financial health of your business and approves your application.

4. Receiving the offer
The terms of the hire purchase are laid out:

• Price of the Van: £20,000

• Deposit: you pay a £4,000 deposit (20% of the total cost).

• Repayment Term: the remaining £16,000 will be paid over 4 years.

• Interest Rate: the annual interest rate on the balance is 5%.

5. Monthly payments
Your monthly payment comes to approximately £368, covering both the principal and the interest.

6. End of the term
After 4 years, you've paid off the van in full. The lender transfers ownership to you officially. You now own the van outright without needing to make any further payments.
By the end of the term, the asset is yours, supporting long-term business growth without overwhelming your cash flow.

This example shows how hire purchase can help you manage large expenses by breaking them down into manageable payments, while you continue to use the asset in your business operations from day one. 

Tips that could help lower your monthly payments

There are factors impacting the cost of a hire purchase agreement. Here are some tips that could help  lower repayments:

• Maintain a good business credit score: a better business credit score often means you will be offered  more favourable interest rates and terms.

• Choose a longer term: extending the repayment period will reduce your monthly payments, though it may increase the total cost due to interest.

• Increase deposit amount: a larger upfront deposit will lower your monthly repayments and total interest paid.

How to find the best hire purchase deals with Capitalise

At Capitalise, we partner with over 100 UK lenders to help you find the best business finance solution. With one application, you can compare hire purchase offers from multiple lenders, ensuring you get the best deal for your business.

Here’s how to get started:

1. Using our registration lookup, input the car's registration number, or the make and model of the vehicle.

2. View the vehicle’s estimated value and potential monthly repayment options.

3. Proceed with your application to receive quotes from several lenders through Capitalise.

Sign up for free today and find the hire purchase agreement that best fits your business.