Find out all about hire purchase financing, and whether it’s a good fit for your company’s needs.
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Hire purchase is a form of lending that provides small business owners with access to assets like equipment, machinery and vehicles.
Under a hire purchase agreement, the lender purchases the asset for the use of the business owner (hirer) in exchange for monthly payments. When the term ends, the hirer has the option of acquiring ownership of the asset, provided that all payments and contract terms have been fulfilled.
Hire purchase financing lends itself to businesses that require cost-intensive equipment, such as construction, engineering and manufacturing companies. Through hire purchase financing, the costs of acquiring an asset are spread out over the long run, enabling small business owners to preserve working capital for other expenses and more productive business activities.
The following are general requirements that can help you assess if hire purchase financing is a good fit for your business:
You’re acquiring the asset for long term use: Hire purchase financing is intended for businesses looking to acquire assets for long term usage. In situations where you need an asset for short term use - such as when you’re with rapidly evolving technology or are using an equipment that depreciates quickly - asset leasing will be a better option.
Your business experiences seasonal fluctuations: With hire purchase financing, most lenders offer flexibility with regards to the deposit and repayment terms. This means that businesses can structure repayments - choosing between options such as balloon payments, fixed payments or seasonal payments - to account for seasonal fluctuations.
Your asset has a high resale value: Hire purchase financing can be a suitable option if you’re acquiring an asset with a relatively high resale value - such as construction machinery or vehicles - as you’ll have the option of reselling it at the end of the term.
Demonstrate your ability to repay your loan
Your ability to repay your loan is one of the key factors of consideration when lenders assess your application. As such, preparing a detailed repayment strategy, along with backup options will give you a leg up in getting your application approved.
You’ll need to draw up a revenue forecast and cash flow projection for the next one to three years, and factor your loan repayments into your cash flow to demonstrate that you’ll be able to meet your payments after other business expenses have been accounted for. Do prepare alternative repayment plans as backup options, in case your initial proposal is rejected.
Build up your personal credit score
Your personal credit score reflects how well you’re able to manage your personal finances - and as such, is an indirect indicator of your ability to handle your business finances, and make consistent, on-time payments. Most lenders take your personal credit score into account when reviewing your application - particularly if your company is a newly founded venture without an established credit history.
If your personal credit score isn’t yet where you want it to be, here are some action steps you can take to bring it up:
Be timely with payments: This is a simple, but fundamental step towards building up your credit score. To prevent possible slip-ups with your bill payments, it can be helpful to schedule monthly reminders or to set up automatic payments through PayPal or your credit card. If you foresee that you’re unable to meet your repayments for a mortgage or personal, make sure you inform your lender well ahead in advance. Your lender may agree to debt restructuring, which will have less of an impact on your credit score.
Monitor your credit report: At the very least, you should be reviewing your credit reports once a year. Be sure to report any mistakes you come across, as even minor errors like miscalculations can affect your credit score.
Avoid making multiple loan applications within a short span of time: Making several loan applications within a short period of time sends up a red flag to prospective lenders. It signifies that you’re in a challenging financial situation, and are scrambling for funds - so this is something that you’ll want to avoid.
Hire purchase financing can be a great option for SMEs in need of equipment financing. However, the application and onboarding processes can prove to be lengthy and rigorous - particularly for businesses seeking funding from banks and traditional lenders. While the processes will vary across traditional lenders, it can sometimes take several weeks before you get an approval and gain access to funding.
The rise of alternative lenders has opened up a greater variety of financing solutions for SMEs. Offering streamlined processes, speedy access to funding and flexible lending terms, these platforms can be a viable option for small businesses looking to finance their equipment acquisitions.