What is Higher Purchase?
Hire purchase is a well structured, convenient, strategic and systematic financing tool within the finance ecosystem.
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 it, in certain installments during a certain assertained period of time, as mentioned in the agreement.
Hire purchase is an important financial strategic tool which helps people to purchase an asset or 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 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 in turn generated this financial concept known as the system of higher purchase.
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 in terms of acquisition of the operational assets which will significantly attract potential investors.
The mechanism of hire purchase is as such that, under higher 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 higher 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 higher vendor’s perspective, if the last installment is defaulted; the higher vendor has the right to repossess the goods without compensating the higher purchaser.
Higher 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 higher purchase system.
What Is A 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 intalments 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 good delivered by the owner 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.
Characteristics of Hire Purchase System:
- The hire vendor/seller delivers the goods to the hire purchaser, they get into a Hire Purchase Agreement.
- Hire purchaser agrees to pay the hire purchase price which consists of cash price along with the interest payable in installments for the remaining/ outstanding amount.
HIRE PURCHASE PRICE = CASH PRICE /PRINCIPAL + INTEREST ON THE OUTSTANDING AMOUNT
- Following the payment of the final installment the ownership is immediately transferred to the hire purchaser. Till then, the ownership rights and the right to repossess the item are with the hire vendor/seller.
- In the event of a buyer payment default, the seller has the right to repossess the goods as the ownership remains with the seller until the final installment is paid. The hire vendor is in a position to reclaim his/her assets and the hire purchaser has to bear the loss of the installments which he or she has made earlier.
Terminology:
Hire Purchaser:
Hire purchaser is the customer or the buyer in the hire purchase agreement. He/she the individual or entity who obtains acquisition of 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 higher 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 higher purchaser to the higher vendor of goods under the hire purchase system. The hire purchase price is mentioned in the agreement along with the duration to be paid.
Advantages:
Financial Tool:
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 significant tangible out of it.
Structural Economic Develpoment:
It helps in the economic progress and development of the business ecosystem. By introducing this financial concept companies have become capital efficient by allocating their capital to the revenue genrating avenues and greatly enhancing the operational efficiency, maintaining a stable liquidity position, lesser capex (capital expenditure), better structural cashflow management while simultaneously; producing consistent, well optimised business results and revenues.
Tax Advantage:
Since the payments are recorded as expenses it has an important element of tax benefit, it is way more tax efficient than various traditional loans. This mechanism, intern helps businesses to get into hire purchase agreements providing for great tax benefits and significant return on assets (ROA) which definitely, turns out to be the game changer and helpful in the filing of taxes and maximizing the profitability in the long run.
Increased Asset Base:
A larger asset base can enhance your company’s financial stability and strength, making it more attractive to potential investors and lenders.
Banks and financial institutions prefer lending to businesses with a solid asset foundation, as it reduces their risk. This leverage can deliver more favourable loan conditions, such as lower interest rates, longer repayment periods, and reduced collateral requirements.
Credit Worthiness/ CIBIL Score:
A hire purchase agreement can boost your business’s credit score.
This will certainly improve the creditworthiness over time and make it easier to secure future financing at more favourable terms, including lower interest rates and better repayment conditions.
Fairly Huge Investment Centric:
Hire purchase agreements can be used by corporate entities that require expensive machinery for the work relating to construction, manufacturing, road developments, transportation, structured logistics, deploying funds for engineering as well as encouraging and building startups/ viable business models having less collateral and credit score but carrying huge potential to grow exponentially.
Enhanced Financial Ratios/ Metrics:
Hire purchase agreement can definitely boost a company’s return on assets (ROA), the return on the capital employed (ROCE) as they don’t have to heavily invest in the acquisition process of the assets, the payments are made in the system of installment basis hence, the company is in a position to maintain good reserves and surplus which intern helps them to have better financial ratios, numbers and maintain a good position.
Disadvantages:
Each and everything comes up with certain exceptions or you may say everything has pros and cons, hire purchase is no exception.
Ownership With Seller Until Final Payment:
- The asset involved is security for the loan, so it could be repossessed at any time if the hire purchaser fails to maintain timely payments
- The lender is the legal owner of the asset until all repayments have been made
Significant Cash Outlay:
Hire purchase agreements at times can be more expensive in the long term than paying in full for an asset purchase.
Higher Rate of Interest:
Certain hire purchase agreements have substantially higher interest rates which results in a higher cash outflow of the company in the long run.
Unfair At Times:
- Hire purchasers suffer a significant loss on returned or reposessed products since they lose the money they have paid towards the purchase up to that point.
- From the hire vendor’s perspective as long as the requisite minimum payment is made the hire purchase customers can return the products declaring the original agreement as unenforceable, they are not in the position to go against the law as they are under an obligation to accept the product before the last installment has been paid as they are the ones who are the legal entitled owners.
Potential Assets That Can Be Financed Through The Hire Purchase system:
Vehicles:
- Vans: Primarily used for logistics, deliveries, and transportation services.
- Cars: sales teams, executive transportation, or general business use.
- Electronic Vehicles: The new age electronic vehicles have gained momentum in terms of their usuage and efficiency, hire purchase helps you transition to an electric fleet while managing costs.
Plant And Machinery:
- For industries like manufacturing and construction, hire purchase allows you to spread the cost of expensive machinery.
Assets:
Hire purchase helps businesses acquire the assets required to potentially improve their operational, managerial and executional efficiencies. Acquiring the world class technological softwares, having the necessary hardwares, top-tier infrastructure to achieve the economies of scale, better integration of the various subsets within the business ecosystem and various other aseets or investments pertaining to business, operational excution and excellence.
Conclusion:
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.
Hire purchase is a well structured, convenient, strategic and systematic financing tool within the finance ecosystem, higher 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 investor.
It helps in the economic progress and development of the business ecosystem.This can be a manageable way for buyers to purchase expensive goods but the goods end up costing more because of the interest.