When starting a small business, it may be more practical to have access to convenient and flexible methods of financing or obtaining equipment. For example, a start-up business may require motor equipment or other costly mechanisms for business operations which at the time, it cannot afford. One possible solution for can be found in the form of a hire purchase agreement.

What is a Hire Purchase Agreement?

Hire purchase agreements enable business owners to hire equipment for a set period of time through a number of instalment payments. There is no actual lending or borrowing of funds involved. In this regard, they differ from traditional loans. The hirer does not become the owner of what is hired, rather the agreement represents only an option to buy equipment at the end. The hirer will assume the role of owner following payment of the final instalment.

You can negotiate an agreement with the owner of the equipment or through a financial organisation. The financial organisation, such as a finance company, acts as a third party through which you transfer regular payments to. If you would like to enter into an agreement, LawPath has access to qualified business lawyers that can assist with drafting the agreement’s terms and conditions.

Advantages of a Hire Purchase Agreement

There are a variety of benefits for small businesses to enter into these agreements.

Firstly, they provide individuals the ability to buy items which they would otherwise be unable to access due to financial constraints. Additionally, it enables the hirer to use the equipment and generate business revenues despite not having paid for it in full. If your agreement is small in scale, it can also be quickly established and finalised within a week.

Secondly, instalment payment prices are fixed at the beginning of the agreement. There is not only increased certainty in adopting this method, but hirers also can reap the benefit of a fixed interest rate, irrespective of changing interest rates from banks. Additionally, there may be long-term tax benefits of delaying ownership. For a hire purchase agreement entered into on or after 1 July 2012, with the Australian Taxation Office, there is the possibility of claiming GST credit for GST included in the purchase price of equipment.

Hence, hire purchase agreements can provide a resourceful, cost-and-time efficient means to small traders and entrepreneurs. The possession of equipment without added financial pressure can thereby be effectively promoted.

Possible Complications of a Hire Purchase Agreement

In the event of administrative complexities and/or financial difficulties, the owner may repossess the equipment and you (as the hirer) will not be compensated. This will be an issue particularly in situations where the time-frame for payments spans widely. However, this can be alleviated when drafting the agreement, to ensure that commencing instalments are smaller than “catch-up” payments towards the end of the contract.

Hirers should be cautious and avoid entering into agreements for unnecessary equipment, as sometimes, the convenience of them leads to artificial demand for products. Again, the core of saving costs should be at the forefront of agreement-making decisions.

To avoid these problems, LawPath offers a quick quotes service, connecting you with our network of expert business lawyers who will assess your business situation and help you determine the best agreement for your needs.

Get your business started on the right path. Contact a LawPath consultant on 1800LAWPATH to learn more about customising a hire purchase agreement and other important legal documents you may need.

Carmen Zhu

Carmen is a Paralegal working in our content team which aims to provide free legal guides to facilitate public access to legal resources. With an interest in consumer and professional negligence law, her primary focus is on the importance of expanding legal awareness to business longevity.