The primary financial benefits for a company using a hire purchase plan include maximizing working capital, the ability to enhance the financial appearance of the company to investors and the potential of payment flexibility.
A Hire Purchase Plan
The hire purchase plan was first developed in the United Kingdom, but it is more commonly known in the United States as a rent-to-own plan. A hire purchase is most commonly employed when a company does not wish to make the capital outlay to purchase a piece of equipment. The company, therefore, signs a rent-to-own agreement in which it makes regular rental payments, a portion of which is applied to the eventual purchase price. If the company carries the agreement to term, then at the end of the agreement, it owns the equipment.
Advantages of Using Hire Purchase
The most obvious benefit for a company in using a hire purchase plan is it does not have to pay the full amount of the purchase up front. This can be very beneficial for a company that needs to obtain expensive equipment but does not have the necessary capital and does not want to increase its debt burden by borrowing money. Companies can sometimes manage to keep the money used to lease the equipment and the equipment off their balance sheets, thereby providing better-looking return on assets (ROA) ratios.
Another financial benefit of using a hire purchase plan is such plans often include maintenance in the contract, so the company does not have to worry about having to pay for any expensive repair costs that may arise. Expensing the rental payments may be more tax advantageous than buying and depreciating the equipment. A hire purchase plan is also beneficial in that it does not obligate the company to keep the equipment, and payment terms are often flexible. For example, if the use of the equipment varies seasonally, payments can often be structured to coincide with the level of usage.