Business hire purchase: spread the cost and own the asset

A balloon is a larger final payment that lowers your regular instalments by deferring part of the capital to the end of the term. It is common on vehicles and on assets with a predictable resale value. At the end you can pay the balloon from cash, refinance it, or sell the asset and use the proceeds. The trade-off is that you pay interest on the deferred amount for the whole term, and if the asset is worth less than the balloon when the time comes, the shortfall is still yours. Lenders size balloons on what they expect the asset to be worth, not on what you would like the monthly payment to be.

On business hire purchase, VAT on the asset is normally payable upfront, because HMRC treats an HP agreement as a supply of goods at the start. The VAT is usually collected with the deposit or in the first payment. A VAT-registered business can then reclaim it through its VAT return in the normal way, subject to the usual rules (for example, the restrictions on cars available for private use). The interest element of an HP agreement is generally exempt from VAT. Because the upfront VAT can be a significant cash outlay, some lenders offer a short VAT deferral or a separate facility to cover it until it is recovered. VAT treatment depends on your circumstances, so check with your accountant before you sign.

Because you are treated as the owner for tax purposes, a business buying plant or machinery on HP can usually claim capital allowances on it once it is brought into use, even though legal title has not yet passed. The interest element is normally a deductible business expense. This is one of the main reasons businesses choose HP over leasing. Which allowances apply, and when, depends on the asset, your business structure and your accounting period, and cars follow their own rules. Our guide to asset finance and capital allowances covers the principles, and HMRC's guidance on capital allowances sets out the current reliefs. Always confirm the position with your accountant before relying on a tax saving in your numbers.

Hire purchase works for both new and used assets, provided the lender is comfortable with the asset's value and remaining life. New equipment bought from a dealer is the simplest case. Used assets are widely financed too, but lenders look harder at age, hours or mileage, service history and the seller. Buying from a private seller or at auction is possible with some lenders, who may want an independent valuation or inspection first. Our page on used equipment finance covers this in detail, and if you already own assets outright, asset refinancing can release cash from them.

Agricultural machinery is a common example: our guide to tractor financing on hire purchase or lease compares the options for new and used tractors.

HP suits businesses that want to own an asset they will use for most of its working life and that can use the capital allowances. Typical users include hauliers and contractors financing vans, trucks and fleets, manufacturers and construction firms buying plant and machinery, and practices and workshops buying specialist kit.

It is less suitable for assets that date quickly, such as IT that you expect to replace every two or three years, where renting may make more sense. It also does not suit intangible or low-resale items such as software, installation or fit-out, which lenders struggle to repossess and resell; soft asset finance or a loan is usually the better fit there. If cash flow cannot comfortably carry the instalments plus the upfront VAT, HP is not the right answer yet.

A straightforward HP application for a mainstream asset from an established dealer is often decided within a few working days, and sometimes sooner. Larger amounts, used or specialist assets, private sales and newer businesses typically take longer because the lender may want accounts, a valuation or an inspection. After approval, signing the documents and paying the supplier usually follows quickly once the deposit and VAT are in place. Timescales depend on the lender and the case, so build in some slack if the supplier needs payment by a fixed date.

The asset itself is the main security on a hire purchase agreement, because the lender owns it until the final payment. If the agreement is not kept up, the lender can recover the asset. For limited companies, lenders often ask directors for a personal guarantee, particularly where trading history is short, the asset is specialist or the amount is large. Additional security over property is not usually needed for standard HP.

The cost of HP is mainly the interest built into the instalments, which is usually fixed for the term. It depends on the lender's view of the asset and your business, the deposit, the term and any balloon. On top of interest, agreements typically include a documentation or arrangement fee at the start and the option-to-purchase fee at the end. Compare agreements on the total amount payable, not just the monthly figure, and check what happens if you want to settle early. It is free to enquire; any broker fee is disclosed separately before you proceed.

• Finance lease: lower upfront outlay because VAT is spread across the rentals, but no ownership.
• Equipment finance: our wider overview of the ways businesses fund equipment.
• Unsecured business loans: useful when the purchase mixes assets, installation and training that HP would not cover.
• Asset refinancing: if you have already paid cash for equipment, you can release some of that money afterwards.