In a nutshell: Hire purchase is a financing agreement where you pay for an asset in instalments and own it at the end. It’s a simple way to get the equipment or vehicles your business needs without a big upfront cost.
When you’re running a business, buying essential assets like vehicles, machinery, or equipment outright isn’t always possible. Hire purchase lets you use an asset straight away while paying for it in fixed monthly instalments. At the end of the agreement, you own it outright.
It’s the third most common type of external finance used by UK businesses: in 2024, around 10% of SMEs used hire purchase or leasing to buy assets. Only credit cards (15%) and overdrafts (11%) were more common.
In this article, we’ll explain what a hire purchase agreement is, how it works, how it compares to other financing options, and how it can impact your finances and taxes.
What is a hire purchase agreement?
A hire purchase agreement is a way to finance business assets without paying the full amount upfront. You make regular payments over an agreed period and once you’ve paid the final instalment (plus any option-to-purchase fee), the asset is yours.
Unlike leasing (another form of asset finance), where you never own the asset, hire purchase gives you the option to take full ownership at the end. This makes it suitable for long-term investments like company cars, machinery, or specialist equipment. And because the asset appears on your balance sheet from the start, you can claim capital allowances and tax relief on the interest you pay.
Hire purchase is common in industries where expensive equipment is essential, such as construction, manufacturing and transport. But it’s also often used for smaller items, like coffee machines or IT hardware.
How does hire purchase work?
With hire purchase, you choose the asset you need, pay an initial deposit (usually around 10%) and then make fixed monthly payments over an agreed term (usually 12-60 months). At the end of the agreement, you pay a small final fee (often just £1) and the asset becomes yours.
Here’s how it works in practice:
You find the asset you want (eg a £25,000 delivery van)
You pay a deposit (eg £2,500)
The finance provider buys the asset and ‘hires’ it to you
You make monthly payments covering the remaining cost plus interest
Once all payments are made, you own the van outright
The monthly payments are fixed, so you’ll always know what’s coming out of your account. And because the asset will be yours at the end of the contract, you can plan for the long term. Some agreements even let you structure payments to match your cash flow, such as making smaller payments in quieter months or a larger ‘balloon’ payment at the end.
What can businesses use hire purchase for? (examples)
Hire purchase is a flexible form of finance that can be used to buy a wide range of business assets, including:
Vehicles: Company cars, vans, lorries, buses (learn more about vehicle finance)
Machinery: Diggers, forklifts, printing presses, agricultural equipment (learn more about machinery finance)
Equipment: Gym equipment, coffee machines, specialist tools
Technology: Computers, servers, point-of-sale systems
Office furniture: Desks, chairs, meeting room setups
Basically, if it’s something your business needs to operate or grow, hire purchase can help you get it without the big upfront cost. And because you’ll own the asset at the end, it can be a good option for assets you plan on using for years.
What are the pros and cons of hire purchase?
Benefits of hire purchase for businesses
Tax relief from day one: You can claim capital allowances on the asset, which will reduce your taxable profits. You can also deduct the interest from your payments as a business expense. It’s one of the most tax-efficient ways to fund assets.
Immediate access to assets: You can start using the asset straight away, without having to wait to save up. This can be particularly useful if the asset helps you generate income, like a delivery van or new machinery.
Predictable payments: Fixed monthly payments make budgeting easier. You’ll know exactly what’s going out each month, with no surprises.
Ownership at the end: Unlike leasing, you’ll own the asset outright once you’ve made all the payments. So you can sell it, upgrade it, or keep using it for as long as you need.
Improves cash flow: Spreading the cost over time frees up cash for other things, like stock, marketing, or unexpected expenses.
Disadvantages of hire purchase for businesses
Higher overall cost: Because you’re paying interest, the total amount you repay will be more than the asset’s up-front cash price. If you have the money to buy the asset outright, it might work out cheaper to do so in the long run. But HP is a great option if you don’t.
Commitment to repayments: Once you sign the agreement, you’re committed to making all the payments – even if your business circumstances change. If you can’t keep up with the payments, you risk losing the asset and damaging your credit score.
Depreciation risk: Some assets, like vehicles and certain types of technology, can lose value quickly. So if you’re financing something that depreciates fast, you could end up owing more than the asset’s worth.
Upfront deposit: Most hire purchase agreements need a deposit, which can be a barrier if cash flow’s tight. If you’re struggling to get a deposit together, you could explore alternatives like invoice finance or revolving credit.
How are hire purchase and finance leases different?
Hire purchase and finance leases are both types of asset finance but they work differently, particularly when it comes to ownership and tax.
Firstly, with hire purchase, you own the asset at the end of the agreement. And with a finance lease, you never own it (though you may have the option to buy it at market value).
Regarding tax, hire purchase lets you claim capital allowances on the asset, as well as deducting the interest from your payments. But with a finance lease, your payments are fully tax-deductible as a business expense and you can’t claim capital allowances.
When it comes to VAT, hire purchase usually requires paying the VAT upfront on the full value of the asset. With a finance lease, you pay VAT on each monthly payment, which can help with cash flow.
In terms of the impact on your balance sheet, hire purchase treats the asset as yours from the start which means it appears on your balance sheet. A finance lease instead records the asset as a liability, which can affect metrics like financial ratios and influence how lenders or investors view your business.
If you’re not sure whether a hire purchase or finance lease is right for you, read our articles on leasing a car through a business and leasing a vehicle vs financing for help comparing the options.
How is VAT handled for hire purchase?
VAT is usually paid upfront when you enter into a hire purchase agreement. You’ll pay it on the full value of the asset at the start of the agreement, which is different from leasing where VAT is spread over your monthly payments.
The good news is that if you’re VAT-registered and the asset is for business use, you can reclaim the VAT in full.
Read HMRC’s guidance for more information.
Wrapping up
Hire purchase is a straightforward way to spread the cost of business assets while benefiting from tax relief and eventual ownership. It could be a good choice if you want predictable payments and plan to use the asset long-term, but it’s worth weighing up the commitment and costs before you decide.
Here’s what to bear in mind:
You pay a deposit and fixed monthly instalments, then own the asset outright after the final payment
Capital allowances and tax-deductible interest make hire purchase a tax-efficient way to fund assets
It’s best suited for long-term investments like vehicles, machinery, or equipment your business will use for years
Fixed payments help manage cash flow, so you can invest in growth without tying up working capital
If flexibility’s more important, leasing or other financing options may better suit your business needs
Want to explore hire purchase or other funding options for your business? Tide’s asset finance connects you with the largest network of lenders in the UK, where you can compare tailored funding options from £5,000 to £20 million. Whether you need a company car, specialist equipment, or machinery, applying online is quick and you could get a decision in as little as 24 hours.
FAQs
Can I secure hire purchase with limited trading history?
Probably, but your options may be limited. Lenders will look at your business’s financial health, so you might need to provide extra security or a larger deposit if you’re new.
How does hire purchase impact my business credit score?
If you make all your payments on time, this could help build your credit score and make it easier to access finance in the future. But any missed payments will have the opposite effect.
What happens if I miss a payment?
Missing a payment can result in late fees and could affect your credit score. If you’re struggling, contact your finance provider as soon as possible to discuss your options.
Can I pay off my hire purchase agreement early?
Yes, but you may have to pay an early repayment fee. So it’s worth checking the terms before you sign.
How does hire purchase compare to a business loan?
A business loan gives you a lump sum to spend as you like, while hire purchase is tied to a specific asset. Loans can be more flexible, but hire purchase often offers better tax benefits for asset purchases.
What are the tax benefits of hire purchase?
You can claim capital allowances on the asset and deduct the interest from your payments as a business expense. This can reduce your taxable profits and lower your tax bill.
Is hire purchase suitable for short-term asset needs?
Not usually. Hire purchase is typically suitable for assets you’ll use long-term. If you only need something temporarily, leasing or revenue-based financing might be a better fit.
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