Definition
Under hire purchase, a financier buys the asset and hires it out to your business. You use it for the whole term and it becomes yours once every payment, final payment included, has been made. For tax purposes it can in some ways be treated much like owning the asset, so ask your accountant whether hire purchase, a chattel mortgage or a lease best suits the business.
Hire purchase is a halfway house between renting an asset and buying it outright. The business gets to use the asset immediately, and it ends up owning it.
The mechanics
Say a landscaping business needs a new tipper. The financier pays the dealer and then hires the truck to the business. The business makes regular payments over the agreed term, and the contract may finish with a larger final payment. When the last payment clears, title moves from the financier to the business.
How it sits next to the alternatives
Under a chattel mortgage the business is the owner from the first day and the lender holds security over the asset. Under a lease, the financier stays the owner and the business may get the chance to buy the asset when the term ends. Hire purchase lands between the two. Each is treated differently for income tax and GST, so talk to your accountant before you commit.
When it suits
Hire purchase makes sense for a business that wants to own the asset in the end but is comfortable with the financier holding title until the contract is paid off. Our equipment finance review compares the structures side by side. To get help with equipment finance, make one enquiry.
Common questions
When do I own the asset under hire purchase?
Ownership passes to you once the last payment required by the contract has been made.
Is hire purchase common in Australia?
It is less common than chattel mortgages and leases for business equipment and vehicles, though some financiers still provide it.
Sources and further reading