The costs of setting up a glamping site, and equipping it with, for instance, glamping pods can be considerable. Such costs need to be met before the site can even start trading, let alone cover its costs, so most prospective owners will need some source of finance to deal with them. In this, and two other blogs about Commercial Loan and Finance Leasing we will look at possible finance arrangements.
What is a Hire Purchase?
Hire purchase is very commonly used to purchase cars, furniture, household appliances etc. It is a hire agreement for a fixed term, containing the agreement that at the end the purchaser will take ownership of the asset (the pod). A finance company provides sufficient money to cover the purchase cost of the item, and the borrower agrees to pay back a fixed amount, usually monthly, over a fixed, pre-determined time. The VAT due on the purchase is included in an initial deposit.
Following repayments include the capital and an amount for (usually quite high) interest. The legal ownership of the item does not transfer to the borrower until the last payment has been made.
What are the Advantages of a Hire Purchase?
- The payments are more like revenue expenses than liabilities. Having a hire purchase agreement in place should not affect other credit ratings.
- Because they are an expense they may be tax-deductible. Advice from a tax expert would be advisable, but in theory, paying back hire purchase could be a tax recognisable cost. The interest element of the repayments is a tax expense.
- You could set up multiple, parallel hire purchase agreements. This could allow the owner to, for example, buy two pods the first year, and two more the second year, each under their own hire purchase agreement. This flexibility may be difficult with other finance arrangements.
- Early settlement is cheaper than Finance Lease. If you think there is a likelihood you may want to settle the deal ahead of its termination, hire purchase will cost less than finance lease.
What are the Disadvantages of a Hire Purchase?
- Fixed-term, and fixed repayment amounts. Once a hire purchase agreement is in place no change can be made to its length or the repayment amount.
- It will be a high-interest cost. Hire purchase deals are amongst the most expensive.
- You won’t own the pods until after the last payment is complete. Any small problem with a repayment, even close to the end of the deal, could easily result in loss of the pods which would still be owned by the finance company. Not only that but unless you complete all payments you will have no equity in the pods at all, so failure to pay, late in the agreement, entails considerable loss.
How Costly is a Hire Purchase?
In simple terms, very expensive. However, if you want a flexible, unit by unit, finance deal it may still be a good deal. If you can negotiate it the tax-saving may set off against the higher cost.
Is a Hire Purchase Right for My Site?
If you have difficult credit, if you want to keep the cost of purchasing pods separated from other costs, if you want to add more units to an established site, then hire purchase may be a helpful option. Get advice on how you can do that tax efficiently.
If you are starting a new site and need to finance land purchase, site modifications, set-up costs, if you have strong credit and can talk to a friendly bank or loan company, then it may not be so good an option.