Hire purchase is a popular financing option that allows businesses to acquire assets without the need for a traditional business loan in Singapore. Unlike standard business loans such as business expansion loans, a hire purchase agreement enables the buyer to make instalment payments over time while using the asset immediately.
This arrangement is particularly beneficial for those who may not have the upfront capital to purchase equipment or vehicles outright. Understanding the hire purchase meaning is essential for anyone considering this method of financing, as it offers flexibility and accessibility in asset acquisition.
Intrigued? Read on to dive deeper into everything you need to know about hire purchase, including the advantages of a hire purchase agreement, and whether a hire purchase loan is the best option suited for your business needs.
What Exactly is a Hire Purchase?
A hire purchase is a financial arrangement that allows you to acquire an asset, like a machine or delivery van, without needing to pay the full price upfront.
Instead, you make regular payments over time while using the asset right away. This means you can start benefiting from the equipment immediately, even if you don’t have all the cash available at the moment.
How Does a Hire Purchase Work?
In simple terms, think of hire purchase as an instalment plan. You agree to pay a set amount each month until the total cost is covered. Once all payments are made, you own the asset outright. This option is particularly useful for businesses that need essential equipment but want to manage their cash flow effectively.
The general steps to how a hire purchase agreement works is as follows:
- The Bank Acquires It (Initially): A financial institution or bank (the lender) purchases the necessary asset (such as a truck, printer, or machinery) from the supplier on your behalf.
- You “Rent” It: Subsequently, the bank leases the asset to your business for a predetermined duration, which can range from 1 to 5 years. You can begin utilising the asset immediately.
- Consistent Payments: Your business is required to make regular, scheduled payments (instalments) to the bank. These payments encompass the asset’s cost along with interest (the finance charge).
- You Possess It (Eventually): This is the crucial aspect! Unlike a lease agreement, once you complete the final instalment payment, the legal ownership of the asset is transferred from the bank to your business.
Top 8 Advantages of Hire Purchase
Flexible Payment Options
Hire purchase allows businesses to pay for items in instalments, making it easier to manage finances
Immediate Access to Goods
Businesses can take possession of the product right away, even if they haven’t completed all payments.
Ownership at the End
Once all payments are made, the business gains full ownership of the item, providing long-term value.
Budget-Friendly
Spreading the cost over time can help the company stick to their budget without sacrificing necessary purchases.
No Large Upfront Costs
Hire purchase eliminates the need for a significant initial payment, making it more accessible for a wider range of businesses.
Potential for Better Deals
Some hire purchase agreements may offer lower interest rates compared to traditional loans.
Improved Credit Score
Regular payments can positively impact a buyer’s credit history, enhancing their credit score over time.
Variety of Products
Hire purchase is available for a wide range of items, from electronics to vehicles, catering to diverse needs and preferences.
Is Hire Purchase Regulated in Singapore?
The Hire Purchase Act in Singapore regulates the hire purchase agreements between buyers and sellers. It provides a legal framework to protect the rights of both parties involved in such transactions.
The act outlines the seller’s responsibilities, including the requirement to disclose all terms and conditions clearly.
Additionally, it offers consumers protection against unfair practices and ensures that they are informed about their rights and responsibilities. Overall, the Hire Purchase Act aims to promote fair dealings in hire purchase agreements.
Is Hire Purchase Common in Singapore?
Yes, it is. Hire purchase is a popular financing option for small and medium-sized enterprises (SMEs) in Singapore due to several key reasons.
Key Reasons Why SMEs Choose Hire Purchase
There are business loan benefits, encouraging SMEs to take these loans. Firstly, it allows SMEs to acquire essential equipment and assets without the need for a large upfront payment. This is particularly beneficial for businesses with limited cash flow, as they can spread the cost over time.
Secondly, hire purchase agreements often come with flexible repayment terms, making it easier for SMEs to manage their finances. This flexibility helps businesses align their payments with their revenue cycles.
Additionally, hire purchase can provide tax benefits. SMEs can claim tax deductions on the interest paid, which can improve their overall financial position.
Lastly, this financing option helps SMEs build their credit history, which can be advantageous for future borrowing. All in all, hire purchase serves as a practical solution for SMEs looking to grow and invest in their operations.
How Much Can You Borrow With a Hire Purchase?
The maximum amount a business can borrow with a hire purchase agreement in Singapore is generally determined by two main factors:
- The Value of the Asset: Hire purchase is secured by the asset being purchased (e.g., vehicle, machinery). The loan amount is a percentage of the asset’s value.
- Regulatory Limits (for vehicles): If the asset is a company car or commercial vehicle, the loan amount is subject to the Monetary Authority of Singapore (MAS) restrictions.
Here is a breakdown of the typical borrowing limits:
1. For Motor Vehicles (Cars and Commercial Vehicles)
The loan is capped by the vehicle’s Open Market Value (OMV), in accordance with the MAS’s rules for motor vehicle loans:
| Vehicle’s Open Market Value (OMV) | Maximum Loan Quantum (LTV Ratio) | Minimum Cash Down Payment |
|---|---|---|
| S$20,000 or less | 70% of the purchase price | 30% |
| Exceeding S$20,000 | 60%of the purchase price | 40% |
Example:
An example of purchasing a company vehicle through hire purchase involves a buyer selecting a car worth $30,000. The buyer pays a down payment of $12,000, which reduces the loan amount required to $18,000. The remaining balance is then paid off in monthly instalments over a set period, with an interest rate agreed upon in the hire purchase agreement.
Once all payments are completed, the buyer gains full ownership of the vehicle. This method allows the buyer to drive the car while making manageable payments, making it a popular choice for many.
2. For Equipment and Machinery
For non-vehicle assets (like construction equipment, IT infrastructure, or industrial machinery), there are typically no direct MAS limits on the loan-to-value (LTV) ratio.
- Standard Practice: Lenders usually offer an LTV of 70% to 90% of the purchase price or valuation of the new equipment.
- The Maximum is Set by the Lender: The final amount you can borrow depends on the finance company’s assessment of:
- The asset’s depreciable life (i.e., the rate at which it loses value).
- The credit profile of your business.
In summary, while vehicle loans are subject to strict government caps (typically 60% or 70%), loans for general business equipment and machinery can often cover a significantly larger percentage of the asset’s cost.
Where Can You Get a Hire Purchase in Singapore?
SMEs in Singapore have several options for obtaining a hire purchase loan.
- Banks: Major banks in Singapore offer hire purchase loans tailored for SMEs. These hire purchase agreements typically come with competitive interest rates and flexible repayment terms.
- Finance Companies: Various finance companies provide hire purchase loans specifically designed for businesses. They often have quicker approval processes compared to traditional banks.
- Specialised Leasing Firms: Some firms specialise in leasing and financing, focusing on SMEs. These companies can offer customised packages that meet the unique needs of businesses.
- Government Schemes: The Singapore government also supports SMEs through various financing schemes, which may include hire purchase options with favourable terms.
SMEs should explore these avenues to find the best financing solution for their needs.
Hire Purchase vs Business Loan
When considering financing options for a business in Singapore, hire purchase and business loans for startup companies are two popular choices. Each has its unique features, benefits, and drawbacks.
| Feature | Hire Purchase | Business Loan |
|---|---|---|
| Ownership | Ownership transfers only after full payment | Ownership is with the startup right away |
| Payment Structure | Fixed monthly payments | More flexible repayment terms |
| Interest Rates | Generally lower than loans | Varies based on lender and credit profile |
| Purpose | Primarily for asset acquisition | Can be used for various business needs |
| Approval Time | Usually quicker | May take longer due to documentation |
| Tax Benefits | Depreciation on fixed assets may be claimed under Capital Allowances
Interest payments are tax-deductible |
Interest payments may be tax-deductible |
Final Verdict: Is Hire Purchase Right for Your Business?
Ultimately, the decision to use hire purchase should align with your business goals: if you need a specific asset to generate revenue, hire purchase offers a structured and affordable path to ownership. While it requires a long-term financial commitment, its fixed repayment structure and capital-saving benefits make it a superior choice over general business loans for funding equipment acquisitions.
Not quite what you were looking for? Holistic Enterprise is happy to speak with business owners to customise a business loan plan, such as an SME working capital loan, entirely tailored to your needs. Submit your loan enquiry or contact us today!