8.12 Conclusions on long-term finance
British Airways plcuses HP arrangements. At 31 March 2007, 31 per cent of the air-
line’s planes (by balance sheet value) were being acquired through HP.
HP agreements are similar to finance leases in so far as they allow a customer to
obtain immediate possession of the asset without paying its full cost. Under the terms
of an HP agreement, however, the customer will eventually become the legal owner
of the asset, whereas under the terms of a finance lease, ownership will stay with
the lessor.
Although HP may be regarded as a form of finance more used by smaller busi-
nesses, it is widely used by large ones, as we have seen with British Airways.
8.11 Grants from public funds
In the UK there are many different grants or sources of finance that are given at little
or no direct cost to businesses. The bulk of such finance emanates either from UK gov-
ernment sources or from the European Union.
Each of the grants is formulated to encourage businesses to act in a particular way.
Examples of such action include:
l investment in new plant;
l development of the microelectronics industry;
l training and retraining staff;
l energy conservation; and
l research and development.
Many of the grants available apply only, or particularly, to businesses located in
specified parts of the UK.
Since there are so many different schemes, and since they tend to alter quite fre-
quently, it is probably not worth our looking at any individual ones here. It must be
emphasised, however, that the amounts that individual businesses may claim can be
highly significant, and that every effort should be made by financial managers to fam-
iliarise themselves with the grants available and how to claim them. The Depart-
ment of Trade and Industry will provide information on most sources of grant finance.
(See the section on relevant websites at the end of this chapter.) Local authorities,
particularly county councils, tend to produce guides to grants available in their own
areas.
8.12 Conclusions on long-term finance
The apparent existence of an efficient capital market, coupled with the evidence on the
relationship between risk and expected return, suggests that businesses are unlikely to
be advantaged significantly by selecting one type of finance rather than another.
An increase in equity financing, which does not expose existing ordinary share-
holders to increased risk, tends to be expensive. Secured loan finance, which does
expose them to increased risk, tends to be cheap. This suggests that there is no advant-
age or disadvantage to existing ordinary shareholders in raising further finance in
one way rather than another. One method may increase expected returns of existing
ordinary shareholders but it is also likely to increase their risk commensurately.