Companies are constantly and consistently looking for potential avenues to raise capital to expand and diversify their operational business activities. Building a successful, fundamentally sound, financially strong, promising, great reputational and generational business, there needs to be a decent cash inflow in the form of ownership capital and debt capital. Companies raise ownership capital from the issue of equity shares and debt capital by issuing creditorship or debt securities.
In today’s progressively advanced economy the potential businesses have devised many viable ways to meet their recurring requirements in regards to capital. Hire purchase is one of the ways to efficiently and effectively meet the requirements of acquiring assets by making payments in an installment basis. It not only helps businesses to acquire the required assets but also to maintain a strong financial position by allowing the acquising of the assets simply by paying periodical installmets thereby, saving a significant chunk of money which the company otherwise would have required to deploy to acquire the asset.
‘Simplified Fiscal Affairs’ presents to you the various topics/concepts in the form of series and imparts the knowledge in a simplified way.
Financial Success Starts Here!
Top Financial Terms You Must Know, Unlocking Your Ultimate Financial Potential!
Let’s further understand the main terms associated to the system of Hire Purchase.
Refined Strategies for Financial Success:
- Finance is the core element of every business organisation. When we mention ‘Finance’, usually it means money, but it is merely not the money, it is a vast concept which is concerned with money and its flow. The word ‘Finance’ is a French word which means ‘Management of Money’.
- Finance is such a powerful medium that, it performs an important role to operate, co-ordinate and control the various economic activities of the business enterprise.
- Finance is also a limited resource like other resources and a business entity needs to manage its finances resourcefully, effectively and efficiently inorder to achieve a fundamentally and financially strong position.
- Finance is essential for expansion, diversification, modernization, as well as for the establishment of new projects.
- The financial policy of any organization mainly determines not only its existence and survival but also the performance and success of that organization. Finance is required for investment purposes and also to meet substantial capital expenditure projects.
- Financial Management is a managerial process that is concerned with the planning, organizing, directing and controlling of financial resources.
Building Stronger Financial Foundations:
- Companies prefer raising of the capital either through its investors or the pulic at large at its later stages. It is usually raised at the maturity stage of the company.
- The company should try to raise its capital in such a way which is cost efficient, well complied and is used optimally as capital raising does not simply mean that you will have a certain sum of money in your custody but it is to be utilised in such a way that the money generates great returns which needs to be paid back to the investors.
- Therefore, the company has to manage the raised capital in the most efficient and productive manner which will give a promising return on capital Employed (ROCE) and return on investment (ROI).
Hire Purchase:
- Hire purchase is a financing method where an item is bought by making payment in installments over time, while the ownership remains with the seller until the last payment is made.
- Hire purchase is a financial method of purchasing expensive consumer items in which the hire purchaser makes a down payment and then pays the remaining amount along with the interest accumulated on the principal in certain installments, during a certain pre-determined period of time, as mentioned in the agreement.
- Hire purchase is an important financial strategic tool which helps people to purchase an asset or make an investment by giving out certain installments in a certain period of time and thereby, eventually getting the ownership transferred from the hire vendor/seller to the hire purchaser.
- The demand for luxurious consumer goods has significantly recorded a consistent rise in the last decade but the real increase in the purchasing power has failed to grow parallelly. Consumption has seen a sharp rise and growth trends, people’s demand for luxurious, lavish or general consumer goods has definitely seen an upsurge.
- This gap between the demand and actual purchasing power has inturn germinated this financial concept known as the system of higher purchase.
- Hire purchase is a well structured, convenient, strategic and systematic financing tool within the finance ecosystem, hire purchase agreements enable companies or individuals with inefficient working capital to acquire those assets and try to gain or make something potentially viable and structured out of it. Large asset base helps companies optimise their efficiency, profitability and attracts potential investors & stakeholders.
- With a hire purchase plan, a company can maximize working capital, improve its financial presentation to investors, and have the option of flexible payment terms. The financial statements of the company will show much stable and progressive financial ratios, adequate working capital, well maintainted reserves and surplus, higher profitablity and overall improved operational efficiency & execution as a result of lesser cash outlay or cash outflow in terms of acquisition of the operational assets which will significantly attract potential investors.
Mechanism of Hire Purchase:
- The mechanism of hire purchase is as such that, under hire purchase system the hire purchaser can get the full possession of goods immediately on payment of the installment over a certain period of time as specified in the agreement. This enables the hire purchaser to fulfill the demand without having to pay the full amount at once. However, the terms and conditions of this financial concept is that the ownership is transferred from the hire vendor to the hire purchaser only after the payment of the last installment is made. This turns out to be quite favourable from the hire vendor’s perspective, if the last installment is defaulted; the hire vendor has the right to repossess the goods without compensating the hire purchaser.
- Hire purchase agreements provide better protection to the hire vendor/seller than the various other financing or leasing options within the finance ecosystem, ownership is not transferred until the end of the agreement that is, the payment of the last installment. The mechanism of repossession of the specific item hassel-free for the hire vendor/seller, if the buyer fails or defaults to make the payments, definitely, turns out to be the game changer in this concept of hire purchase system.
- Hire purchase agreements are used to pay for very expensive consumer goods or high-end business and oprational assets so that the buyer doesn’t have to outlay a large amount of cash all at once. The hire vendor and hire purchaser get into the hire purchase agreement. The hire purchaser has to make the timely installments along with the interest on the outstanding principal amount for the tenure as mention in the agreement. The hire vendor remains the legal owner of the asset till the payment of the last installment and has the right to repossess the asset in case of default of payment from the hire purchaser.
- The system of Hire Purchase helps in the economic progress and development of the business ecosystem. This can be a manageable way for buyers to purchase expensive goods but at times, the goods end up costing more because of the interest factor.
Hire Purchaser:
Hire purchaser is the customer or the buyer in the hire purchase agreement. He/she the individual or entity who obtains or acquires the assets but doesn’t immediately gain the ownership; they pay the agreed upon installments over time, with ownership transferring only on the payment of the last instalment.
Hire Vendor:
Hire vendor is the seller in hire purchase agreement, he is the one who is ready to sell the goods by making a hire purchase agreement with the payment of cash price along with interest that is, the hire purchase price in a certain period of time as per the agreement.
Cash Price:
Cash price denotes the amount to be paid for purchase in cash. The cash price in a hire purchase is the actual cost of an item before interest is added. It is the principal amount or esentially the base price without any added interest or fees, it’s the core amount or the fundamental value for acquiring any given asset.
Down Payment:
Down payment is the initial payment payable by the hire purchase or buyer at the time of entering into a hire purchase agreement. It is a mandatory payment which helps to begin the agreement.
Hire Purchase Price:
HIRE PURCHASE PRICE = CASH PRICE /PRINCIPAL + INTEREST ON THE OUTSTANDING AMOUNT
Hire purchase price is the total amount payable by the hire purchaser to the hire vendor of goods under the hire purchase system. The hire purchase price is mentioned in the agreement along with the duration to be paid.
Hire Purchase Agreement:
Hire purchase agreement is one in which goods are let out on hire and the hirer has the option to purchase them in accordance with the terms of the agreement. Hire Purchase agreement is also known as the credit agreement as an asset is hired and paid on a montly basis in intallments as agreed upon. The legal ownership stays with the hire seller until the final payment is made.
Hire Purchase includes agreements in which possession of goods delivered by the owner (hire vendor) there of to a person, has a condition that such a person (hire purchaser) has agreed to pay the amount in periodic installments. The property in the goods will pass to such a person upon payment of the final instalment. Such a person has the right to cancel the agreement at any time before the property is transferred. Each hire purchase agreement must be in writing and signed by all the parties involved within the framework.
What Should A Hire Purchase Agreement Cover?
- The relevant personal details of the parties involved such as full name, residential addresses and ages of the parties to the agreement,
- The name, type, model no. etc of the good(s) being hired/purchased through the agreement
- Duties and responsibilities of and between the respective parties,
- The consideration / price to be paid and duration and method of payment (in installment or otherwise – as the case may be)
- Duration or the term of the agreement,
- Penalty clause explaining the details of what the penalty would be if either party defaults in fulfilling its duties in accordance with the agreement,
- Warranty details, mentioning the product and service warranties as agreed between the parties,
- General clauses such as termination of agreement, applicable laws, dispute settlement clause, confidentiality, intellectual property rights, etc.), and
- Date of signing of the agreement.
