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For many businesses, access to specialist equipment or machinery is an essential factor for growth and profit increase. However, the upfront cost of purchasing the necessary equipment can be a huge drain on working capital, especially for a new or small business.
Equipment hire or purchase hire is designed to give businesses access to equipment that enables them to expand and operate more efficiently, without needing to come up with the cash up-front. Businesses have the opportunity to lease far higher-spec equipment than they would have been able to afford through a cash purchase.
Whilst some choose a simple equipment hire solution, others favour a hire purchase arrangement. With a hire agreement, the equipment belongs to the supplier and must be returned at the end of the rental period. But, with a hire purchase agreement the hirer pays monthly instalments towards the capital value of the equipment, so there is eventually a transfer of ownership to the hirer.
Below we outline some of the key differences between these two options.
What is an Equipment Hire Agreement?
Also known as an Equipment Rental or Equipment Lease agreement, an Equipment Hire Agreement is a contract between two parties where one party (the supplier) loans equipment to the other (the hirer). The supplier agrees to the hirer having control and use of the equipment during the rental period in exchange for fixed (usually monthly) payments. Supplier of hirer can be either an individual or a company, however, the agreements differ slightly for sole traders or individuals to businesses, since some agreements come under consumer credit regulations.
When are Equipment Hire Agreements used?
Equipment Hire Agreements are commonly used for heavy equipment hire, such as in construction or agricultural industries, where excavators or bulldozers may be required for a specific project. Other industries such as events planning, commercial cleaning providers or landscape gardeners also use equipment hire agreements to lease smaller equipment for specific jobs. For example, a photographer may hire a specialist lens in order to photograph a wedding, and return it to the supplier afterwards. Thus they avoid having to pay the full value of the lens in order to use it.
Alternatively, medical devices (such as wheel chairs), office equipment (such as air purifiers), or sporting equipment may be leased through an equipment hire agreement. In general, Equipment Hire Agreements are well suited to temporary equipment needs, where the hirer is not interested in long term ownership of the equipment.
What are the terms of an Equipment Hire Agreement?
An equipment Hire Agreement will typically cover the following areas:
What is a Hire Purchase Agreement?
As with an Equipment Hire Agreement, a Hire Purchase Agreement allows the hirer full control and use of the equipment during a fixed period whilst paying regular payments. However, instead of the equipment reverting back to the supplier at the end of the agreed period, with a Hire Purchase Agreement the hirer is in fact purchasing the equipment on a finance scheme.
Pros and cons of a Hire Purchase
Hire purchase allows a business to purchase essential equipment without needing a big lump sum. It may allow your business to purchase equipment that is initially out of your budget, by splitting the cost across many months. This helps with your cash-flow and financial forecasting.
Interest on a hire purchase is typically fixed for the duration of the repayment term, making it more cost effective than taking out a bank loan or overdraft to purchase the equipment outright.
Unlike equipment rental, a hire purchase means your business can keep the equipment at the end of the repayment term and continue to use it. Depending on the type of equipment and the nature of its use, this could be a clear advantage for businesses in the long run. Particularly if the equipment is something that your business requires for its long term ongoing operations.
However, it is important to consider the depreciation of the equipment. By the time the repayment period is over and the equipment is yours, it may have lost its value and need replacing fairly soon, tying you into another hire purchase. If the equipment is only needed for short projects, multiple short term hires may be easier than owning the equipment yourself.
An additional disadvantage of going down a hire purchase route is the greater overall cost. Due to the accrued interest you will end up paying more for the equipment than if you bought it at the outset. It also means that you are committed to ongoing payments, which could become burdensome if your business went through financial difficulties.
Making the right choice for your business
Each business will have unique circumstances, so there will not be one preferred option for all. Thorough research into the best options available will be time well spent in terms of finding the best solution for your business equipment needs.
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