This option allows a business to lease (rent) an asset, such as equipment or vehicles. The business enters into an agreement with a leasing company to pay an agreed amount over a period of time for the use of the asset. The business has full use of the asset but never owns it.
The asset can be updated for a new model at the end of the agreement. It is a good option for keeping cash in a business or when equipment that dates quickly is required. Buying the asset outright would be very costly.
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An asset is something of value that is owned by a business (e.g. land, equipment, stock).
Hire Purchase
Hire purchase allows a business to use an asset, such as equipment or vehicles, immediately and pay for it in instalments. The asset is only owned when the last instalment has been paid.
A hire purchase deal involves three parties: the buyer, the seller and the finance company (financial institution). The financial institution pays the seller for the asset and collects regular instalments from the buyer.
These instalments include interest and other fees, which make hire purchase more expensive than buying the asset outright.
Hire purchase is a good option for a business that needs assets quickly but does not have the money required to buy them outright.
LONG-TERM SOURCES OF FINANCE
Long-term sources of finance can be repaid over more than five years (e.g. a long-term loan) or may not need to be repaid at all.
Retained Earnings
Retained earnings is when a business is financed using its profits. For example, JJ Ltd made a profit of €3 million in 2016. It decided to reinvest €2 million back into the company to help it expand and grow. This €2 million is retained earnings.
This is seen as a free source of finance as there are no repayments or interest. The business has to have enough profits to use this as a source of finance.
