As entrepreneur or small business owner who may have financial constraints, you may consider the option of hire purchase as a way of financing your business. But then, there are things you need to consider before signing a hire purchase contract.
Before we proceed to talk about the points to consider, let’s talk about the meaning of Hire Purchase.
What is Hire Purchase?
Hire purchase is an arrangement where a buyer makes a deposit of part payment of goods and pays the balance with interest in installments. Hire purchase agreement allows the buyer to take possession of the goods after making down/ part payment, while the seller maintains ownership until the final payment is made. It provides the buyer opportunity to take delivery and start to make use of the assets before complete payment is made. Entrepreneurs or start-ups who need expensive machinery but lacks the fund and collateral to secure lines of credit can use hire purchase system to acquire working tools. Read 5 Resources An Entrepreneur Must Have At His Disposal To Harness Entrepreneurial Business Opportunity
Despite how good this sounds, there are points you must consider before buying goods on hire purchase
9 Points To Consider Before Buying Goods On Hire Purchase
- Types of good
- Need for the good
- Capacity to pay
- Payment method
- Interest rate
- Conditions for delivery
- Title transfer terms
- Default
- Repossession
Goods Type
The nature of the assets in question, their condition, the quality, as well as the quantity being transferred to the buyer.
If You Indeed Need the Goods
Don’t buy anything on hire purchase because it’s been offered to you, but for the need of it. In hire purchase, buyers take delivery and possession of goods before they are fully paid for. This may tempt them to buy what they really don’t need. It is not advisable to by luxury goods on hire purchase. You rather buy income generating goods on hire purchase. Hire purchase system is usually more expensive in the long run than paying for the goods at once, therefore hire purchase should only be considered if the goods can generate income during the payments period or if the assets appreciate in value over time.
Your Capability to Pay or the Capacity of the Good to Pay Off Its Cost
Hire purchase and installments payment may tempt individuals, small business owners to buy goods that are beyond their reach, and the later find it hard to complete the payment of the goods. Check your income and the frequency it comes to be able to conveniently pay for the goods in installments as at when due. Do a thorough assessment to sure the goods can pay off their purchasing costs. It doesn’t make sense if the goods cannot generate revenue to pay for their costs. If you fails to meet up the instalment payments, the seller would repossess the goods and you will lose all the payments you have made up to that point.
Payment
The amount of the deposit or down payment you are required to make to secure the property from the seller, the amount of installments and time intervals. It also include when the final payment is due. And if you will have a recourse (discount) if you make the complete payment before the due date.
Interest
Since payment is being made in installments, the seller will also add the amount of interest he intends to collect during the length of the payment period. As a buyer, you need to consider how the interest commensurate with the market value of the asset and the duration of payment.
Delivery
How and when delivery of the property will take place.
Title Transfer
The date by which the title should transfer to the buyer as long as the conditions of the contract are fully met.
Default
The contractual agreement should detail when the buyer is in default of his obligation. Some default conditions are stiff and can’t be met by buyers. Some dubious sellers give default conditions they know fully well that the purchasers will not be able to meet, with hope of repossessing their (sellers ) property. But some purchasers in their myopic thinking or due to their dire need for the asset and lack of fund are either pressured or they willing accept such offers. So it behooves on you to be sure you understand the default conditions and that they are not too stiff for you.
Repossession
Hire purchase contract usually contain repossession clause which describes the procedure for the seller to recover any property in the event the buyer default in payment. The clause typically gives the seller the right to enter the premises to take possession of equipment and other personal property. You should therefore, ascertain if you would be willing to hand over the assets to the seller or would not infringe on his right to enforce such clause in case you breach the contact.
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