External sources of finance

‘Medium term’

Introduction:
 The two main sources of medium-term external finance are
o Hire purchase
o Leasing
 These method are often used to obtain fixed assets with medium life span
(one to five years)

Hire purchase:
 Is a form of credit purchase
 It is when a company agrees to pay fixed repayments or installments over
an agreed time period.
 The ownership of the asset belongs to the leasing company until last
payment is made.
 Although after the last payment the asset belongs to the company.
 The company can refuse to purchase the asset and can return it any time
until last payment, but the leasing company will do no refund.
Leasing:
 This is obtaining the use of equipment or vehicles and paying a rental or
leasing charge over a fixed period.
 Ownership of the asset never changes and remains with the leasing
company.
 The leasing company will repair and update the asset as a part of the
agreement.

Conclusion:
 Neither hire purchase nor leasing is a cheap option
 The leasing company will charge high leasing charge or installments for
the flexibility they are offering
 Still this form of arrangement is best for the businesses as it improves
short-term cash-flow position of a company.
 The cash flow is improved because in either case the company does not
have to pay in full in cash.
 However in the long run this both techniques are expensive.