Every business owner wants to learn the financing options available to them when acquiring assets for their business. Hire purchase is quickly becoming one of the best ways to acquire and own assets, especially in Kenya. Hire purchase, also known as lipa mdogo mdogo or lipa pole pole, allows a business owner to acquire assets at only a fraction of the total cost. This credit agreement requires the buyer to pay as low as 10% of the cost of the asset. One can clear the cost of the asset over a duration of time in the form of monthly installments.
Why consider a hire purchase for purchasing business assets
The number one reason to choose hire purchase financing when acquiring assets is the opportunity to spread the cost. This means that you do not have to pay the lump sum amount to acquire assets. Distributing the cost over several months means that you can have control over the cash flow of the business.
Another benefit of hire purchase is that the interest rates are favorable unlike in the case of term loans. Interest rates are also fixed, and this protects you from an increase in the cost.
Key Considerations Of Hire Purchase
Before signing the hire purchase agreement to acquire any asset, there is a need to keep several factors in mind:
1. Goods types
Before entering a hire purchase contract, there is a need to assess the nature, condition, quality, and quantity of the assets you intend to acquire. It is also vital to determine whether you even require the assets. Business owners should focus on assets that help them enhance productivity.
2. The capability to pay the installments
Acquiring goods on hire purchase can be tempting, considering that one acquires the goods before even completing the payments. For business owners, it is vital to check income and frequency to make sure that you can conveniently pay for the goods in installments on time. Late payments can attract penalties while failure to make payments can see the seller repossess the goods. When this happens, you will lose all the payments you have made to that point.
3. Payments terms
One needs to determine the down payment they need to acquire the assets, the number of installments, and the frequency of making the payments. It is vital to check the interest rates and ensure it is proportionate with the market value of the assets.
4. Title transfer
A good hire purchase contract also details the date for the transfer of the ownership of the assets to the buyer after meeting the conditions of the contract.