Hire purchase agreements are contracts between a person supplying equipment (the financier) and the person hiring the equipment (the hirer). They allow businesses to hire equipment through instalment payments. Unlike traditional loans, there is no lending of funds; instead, the hirer pays for the equipment over time until the financier receives the full price of the equipment. At the time the hirer completely pays the price for the equipment, they have the option of buying the equipment. The equipment legally belongs to the financier until the hirer has made the final payment. There are many advantages of entering into hire purchase agreements over outright buying equipment. Here are 5 examples of how a hire purchase agreement could benefit your business.
1. Certainty and Security
Firstly, there is a higher level of certainty for financiers and hirers who have a hire purchase agreement. The prices for payment instalments are fixed at the beginning of the agreement, so financiers are guaranteed to receive ongoing payments from the hirer. If the hirer fails to make a payment, the financier is secure in knowing they can repossess the equipment. The hirer is also benefits by having a fixed price to pay, which are guaranteed not to increase. They are making payments on a fixed interest rate, instead of variable interest rates from the banks.
2. Low Initial Financial Commitment
Hire purchase agreements allow businesses to buy equipment that would otherwise be difficult to acquire due to financial constraints. They are especially beneficial for new small and medium sized businesses. These businesses may not have the financial security of incoming profits yet. Hire purchase agreements benefit businesses by allowing you to generate revenue in the short-term with the acquired equipment. This in turn helps pay for the continuing instalments. Overall, they help new business owners get their business up and running with minimal financial commitment at the start.
3. Purchase Of Better Quality Items
In addition to allowing businesses with limited finances use equipment, hire purchase agreements allow businesses to shop around for more costly and quality equipment, giving even more flexibility in what you buy. If the equipment doesn’t need to be bought outright, then it is possible to afford better equipment because the larger payment can be spread out.
4. Fewer Restrictions
Leases often restrict what the leaser can do with the equipment they lease. They are subject to additional costs, such as loss of security deposits, if the conditions of use are not met. These restrictions don’t apply to hirer’s who can use the equipment as their own.
5. Reduced GST Tax
Businesses could claim GST credit from the Australian Taxation Office, for GST in the price of equipment for a hire purchase agreement dated on or after 1 July 2012. Using a hire purchase agreement eliminates the monthly tax which is normally be added to the instalment payments in a lease. The sales tax charge or other upfront taxes are reduced in the long-term because the financier usually allows the hiring business to combine the cost into the agreement.
Conclusion
Hire purchase agreement pose many benefits to business. They are especially helpful for the functioning of new and smaller businesses who are looking to start their business with quality items, but don’t have the financial means to buy them upfront. Contact a business lawyer to draft a hire purchase agreement, to get the equipment you need to run your business now rather than later.
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