ESPECIFICACIONES TECNICAS/ OBJETO Y CAMPO DE APLICACION

In the medium and long term, businesses are concerned with growth and/or consolidation. They will want finance to fund expansion by acquiring more assets or increasing the factors of production that they can bring to bear as inputs into the business. Consolidation will invariably involve replacing assets as they reach the end of their useful life, as well as developing the use to which existing factors of production may be put, for example, by investing in training the workforce.

The options for financing this are:  Share issues

This option is only available to PLCs. They can offer new shares to the investing public. Investors are invited to put money into the company in return for (possible) future dividends and the possession of a stake in the company which can be sold if required. The return on the investment may be seen as both the dividend and any increase in the share price.

The success of a share issue depends on the growth and profit track record of the issuing company as well as the market conditions prevailing at the time. Timing can be very important. As such, share issues are normally carried out through a merchant bank intermediary who will have the expertise to handle them (which a PLC will not generally have).

In some cases businesses will offer the new shares only to existing shareholders. This is known as a rights issue. Shareholders are not obliged to buy the new shares, but there can be strong reasons for doing so.

 Loan stock

As an alternative to making a share issue, a PLC can issue loan stock. Purchasers of this stock will not become shareholders, but will be creditors. They will lend their

money to the business and expect to receive regular interest payments and eventually their money back when the loan stock matures.

The very best companies will not usually have to offer any security against their loan stock issue as their track record of success is all the security necessary. Others may have to put up assets as security and run the risk of not getting any takers at all, depending on the attractiveness of the security.

 Debentures

Debentures are another form of loan. They are, in effect, a loan contract taken out with a lender (for example, a bank). Again, the lender is not an owner but a creditor, with the business borrowing the money and undertaking to pay interest on a regular basis and to repay the loan at the agreed time.

Debentures are generally secured on the assets of the business, which means that debenture holders have first call on those assets should the company not be able to meet its obligations to pay interest or repay the loan. This option is available to both limited companies and PLCs.

 Leasing

If a business needs assets, such as a new computer system or fleet of vehicles, it has the choice of buying them outright or leasing them.

In practice, leasing is a form of hire under which the business has the use of the

computers or vehicles for an agreed period. The business leasing the assets is obliged to look after their maintenance. In some cases, there may be an option to buy the assets at the end of the lease. This arrangement is called lease/purchase.

Leasing is particularly advantageous in situations of uncertainty or where the business is not willing to commit large capital sums to buy assets. It can also make sense where technology changes rapidly and a business needs to update its equipment regularly. Leasing can also have tax advantages for both the business leasing the assets and the lessor, and is available to all types of business.

 Commercial mortgages

Some companies may own the freehold of real estate premises in the form of factories, office accommodation or warehouses. These assets will have a value in the company's accounts. If the business wants to raise a capital sum for investment in new assets, it could take out a commercial mortgage with a property company. Normally the

maximum mortgage will be between 60% and 70% of the property value. The

premises themselves are used as security and the mortgage loan will usually be for the long term.

The advantage of this arrangement is that the business can continue to use the

premises as before. In addition, any increase in property values over time still belongs to the business and not the property company to which it has been mortgaged.

However, it must service the commercial mortgage in terms of interest payments and eventually repay the capital sum.

 Asset sales

All businesses own certain assets – computers, vehicles, machinery, etc. Their value is also recorded in the accounts under the general heading of fixed assets. Where such capital assets are surplus to the business's requirements, one option is to sell them and convert them into cash, which can be used to purchase new assets or to repay debts, etc.

 Sale and leaseback

This option relates to real estate assets. Where a business owns premises and needs to raise finance, it may sell the freehold and simultaneously arrange to lease it back. The business converts the real estate fixed asset into cash, but will continue to be able to use the property as before. These arrangements are generally very long term, to guarantee the continued availability of the asset to the organisation.

The advantage of this method, compared to the commercial mortgage option, is that 100% of the freehold value is realised, which is higher than is possible with a

mortgage. However, the business will not enjoy any future increase in the property's market value.

Sale and leaseback may also be possible for certain types of capital equipment, such as large machinery.

 Bank loans

All the major banks offer a range of business loans. They range from a few months to up to 25 years.

Some loans are at a fixed rate of interest, which is agreed at the start of the loan period and applied throughout the period of the loan. Other types of loan may have a variable rate of interest. Here, the interest rate will fluctuate over the period of the loan in line with interest rates in the economy.

Banks will usually tailor a loan package to suit the requirements of individual

businesses and will also carry out a risk assessment on the business before going ahead with the loan. Depending upon the outcome of the risk assessment, the lender will normally require some form of security (either business or personal assets) to guarantee the loan and may require the business to issue a debenture to the bank. From the point of view of the business, there will be the need to meet interest payments and make provision to repay the loan itself.

 Grants

Governments will provide financial support to business in certain circumstances.

The circumstances vary and an individual government's policies may be constrained by wider considerations, for example, the UK government's policies must not contravene European Union rules.

The major grants are related to regional policy. There will always be some regions of a country which lag behind others in terms of employment and living standards, for example, due to the predominant industry in the region being in decline. Businesses that locate in these regions may get grants, especially related to investment and even existing businesses that threaten to move out may receive grants. There are usually conditions attached to grants, including guarantees of continued business and the creation of jobs.

The main attraction of grants is that they constitute free finance as there are no interest charges or repayment of capital.