What is a Hire Purchase Agreement?

A hire purchase agreement allows business owners to acquire equipment through installment payments over a set period. Unlike traditional loans, no funds are borrowed, and ownership isn’t transferred until the final payment is made, offering an option to buy at the end of the agreement.

You can arrange hire purchase directly with the equipment owner or through a financial institution. In the latter case, the finance company acts as an intermediary, managing the regular payments.

Key points:

• In hire purchase, the buyer pays a deposit and then installments with interest.
• It’s typically used for high-cost goods.
• It isn’t considered a credit extension.
• Ownership transfers only after all payments are completed.
• Hire purchase often costs more than paying upfront.

How a Hire Purchase Agreement Works

A hire purchase agreement is a credit arrangement between a buyer and a seller, typically used to buy products. After making an initial payment, the buyer continues to make regular installment payments until the total purchase price is paid off, at which point ownership of the product transfers to the buyer.

These agreements are similar to rent-to-own transactions, as they allow the buyer to acquire the product while spreading the cost over time. Hire purchase agreements can benefit consumers with poor credit by making expensive items affordable through extended payment plans.

Since ownership remains with the seller until the end of the agreement, hire purchase plans provide more protection to the vendor compared to other sales or leasing methods. This is because the items can be repossessed more easily if the buyer fails to make the required payments.

Advantages and Disadvantages of Hire Purchase Agreements

Hire purchase agreements may be a way to support your business operations, but seeking one will require some weigh-ins.

Advantages

Hire purchase agreements enable companies with limited working capital to acquire necessary assets. They can also be more tax-efficient than standard loans because payments are recorded as expenses, potentially offsetting tax benefits from depreciation. The Australian Taxation Office (ATO) in particular treats hire purchase deals entered after 27 February 1998 as sale and loan transactions, and the hirer who got the assets can claim deductions if the assets have depreciated in value. The Income Tax Assessment Act 1997’s Division 240 governs the taxation mechanics in a hire-purchase agreement.

Businesses requiring expensive machinery, such as those in construction, manufacturing, and transportation, often use hire purchase agreements. This method is also beneficial for startups with little collateral to secure credit lines. Additionally, hire purchase agreements can enhance a company’s return on capital employed (ROCE) and return on assets (ROA), as less debt is needed to acquire assets.

Disadvantages

However, hire purchase agreements can be more expensive in the long run due to higher interest costs compared to full payment purchases. They also add administrative complexity for businesses. Furthermore, hire purchase and installment systems may tempt buyers to acquire goods beyond their financial means, potentially leading to high interest rates that are not always explicitly stated. Buyers can return the goods to void the agreement, provided they have made the required minimum payments, but they will lose the amount paid towards the purchase up to that point.

Hire Purchase Agreement Contracts

Regardless of the parties involved, certain key elements are essential to ensure a hire purchase agreement is legally binding and enforceable. These contracts must include:

• Buyer’s and seller’s names, address and contact details 
• Date of the agreement being drawn up
• Description of the item in question
• The item’s purchase price, the number of installment payments agreed and the amount of each installment payment, and the amount of the final payment
• The dates when each installment are due
• Annual percentage rate (APR)
• Applicable fees and additional charges

Additionally, the contracts should clearly state that they are hire purchase agreements and specify the withdrawal period. For example, the seller may allow the buyer to exit the agreement within 15 days of furnishing them the contract. A corporate solicitor must review and approve the agreement for its compliance with the Personal Property Securities Act 2009 and the Income Tax Assessment Act before both sides can sign.

Conclusion

Hire purchase agreements offer a practical and advantageous solution for businesses in Australia looking to acquire essential equipment without straining their finances. By providing immediate access to assets, improving cash flow management, and offering tax benefits, these agreements can significantly contribute to a company’s growth and operational efficiency.

Understanding the steps involved in drafting a hire purchase agreement and recognising the benefits can help businesses make informed decisions about their financing options. With careful planning and negotiation, a hire purchase agreement can be a valuable tool for achieving long-term business success.

DISCLAIMER: This article is for informational purposes only and does not supersede official business advice. BARTERCARD does not assist in the facilitation of hire purchase agreements.