Chapter 8 • Sources of long-term finance
l Loan notes easy to liquidate if listed on a stock exchange; otherwise could
be difficult.
l Loan covenants (or restrictions) likely to be involved.Convertible loan notes
l Loan notes that entitle the holders to convert to ordinary shares on or after
a particular date at a particular rate of conversion.
l Not a very important source of finance in recent years.
l Tend to be used where investors prefer the certainty of a loan, with the option
to convert should the equities perform well – it is an option to convert, not
an obligation.
l Loans are self-liquidating; they do not require a cash outflow from the business.
l The relatively low issue costs of loan notes means that, ultimately, convert-
ibles are a cheap way of issuing equities.
l Other factors similar to those of loans before conversion and equities afterwards.Warrants
l Options sold by, or attached to loan notes issued by, the business. They en-
title the holder to subscribe for new shares issued by the business at a specified
price at, or after, a certain date.Term loans
l Loans negotiated between the business and financial institutions, for example
a clearing bank.
l Very important source of finance for businesses of all sizes.
l Cheap to negotiate – very low issue costs.
l Usually able to be negotiated to suit the borrower business’s precise needs.
l Most aspects of term loans are the same as loan notes.Asset-backed finance (securitisation)
l Raising funds by selling the rights to future cash flows in the form of a security.Finance leases
l An arrangement where a financial institution buys an asset which it leases to
the user for a substantial proportion of the asset’s life.
l Quite an important source of finance.
l In effect this is a loan secured on the asset concerned, and the factors relating
to loan finance apply to finance leases.Sale and leaseback
l An arrangement with a financial institution that it will buy an asset already
owned by the business and lease it back.
l Quite an important source of finance.