Chapter 8 • Sources of long-term finance
Only by coincidence will the appropriate discount rate be equal to the rate inherent
in the finance lease. This latter rate will tend to reflect the relatively risk-free nature of
lease financing from the lender’s point of view. To the user of the asset, the level of risk
is likely to be rather greater than that borne by the lender. It would therefore be illog-
ical to discount the cash flows from the asset at the rate implicit in the finance lease.
We shall consider more fully in Chapter 11 the importance of separating the invest-
ment and the financing decision.
Finance leasing is so similar in practical effect to secured borrowing that the factors
that both ‘borrower’ and ‘lender’ need to consider are much the same in respect of
each of them.Sale and leaseback
Sale and leasebackis a variation on a finance lease. Where a business needs finance,
and has a suitable asset, it can sell the asset to a financier, with a leaseback deal as part
of the sale contract. Thus the business retains the use of the asset yet gains additional
funds. Again this is very similar to a secured loan.
Land and buildings are often the subject of sale and leaseback deals. Recently, sev-
eral major UK businesses have sold off freehold properties in this way. Numerous UK
supermarkets and public house and hotel chains have sold and leased back some of
their freehold properties over recent years. This is now a significant source of finance
for many businesses.
Tesco plcsold 21 of its freehold properties to raise £500 million in March 2007.
Surprising subjects of sale and leaseback deals are professional footballers. The play-
ing contracts of several English Premier League footballers are owned by the leasing
arm of Barclays Bank plc, rather than by the club concerned. Perhaps the best-known
player to whom this applied was Rio Ferdinand, the England defender, who was
leased from Barclays Bank by Leeds United when he played for that club (Fletcher 2002).Hire purchase
Hire purchaseis a form of credit used to acquire a non-current (fixed) asset. Under the
terms of a hire purchase (HP) agreement the buyer pays for the asset by instalments
over an agreed period. Normally, the customer will pay an initial deposit (down pay-
ment) and then make instalment payments at regular intervals (perhaps monthly)
until the balance outstanding has been paid. The buyer will usually take possession of
the asset after payment of the initial deposit, although legal ownership of the asset will
not be transferred until the final instalment has been paid.
Hire purchase agreements will often involve three parties:l the supplier
l the buyer
l a financial institution.Although the supplier will deliver the asset to the customer, the financial institution
will buy the asset from the supplier and then enter into a hire purchase agreement
with the buyer. This intermediary role played by the financial institution enables the
supplier to receive immediate payment for the asset but allows the customer a period
of extended credit.‘
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