Funding Methods - Hire Purchase

Risk: You assume risk.

Market Share: 25%.

Popular With: Smaller companies running fewer than 10 cars. The traditional method for smaller companies who are used to dealing with retail sector. Cash is provided by a dedicated Finance House. The repayment profile is typically an initial deposit of 20% followed by equal monthly installments to repay capital cost of vehicle plus funding.

Advantages:

Ø Cashflow: payment by installments.
Ø Writing down allowances apply.
Ø Interest element allowed against tax.
Ø An alternative funding line to Bank overdrafts.
Ø Attracts fixed rate interest.

Disadvantages:

Ø Inflexible: difficult to escape the outstanding settlement if, say, a vehicle is no longer needed.
Ø High deposit compared with Contract Hire.
Ø Appears as a debt on the balance sheet which could inhibit future borrowing.
Ø Can be more expensive than Contract Hire due to 1995 VAT changes.
Ø Burden of controlling and running the fleet.

Summary:

Traditional option which is losing ground. A major casualty after the August 1995 VAT changes, because it does not have any significant advantages - unless being used to purchase pool cars - while Contract Hire is becoming more popular.