Business Finance · Structure and methods of financing a company

Hybrid Finance, Leasing and Other Methods of Company Financing

Updated 11 October 2026 · Fact-checked

Hybrid finance mixes debt and equity features, such as convertible bonds and warrants. Leasing, hire purchase, venture capital and securitisation are other ways to fund assets or growth. To answer questions, identify the instrument, state who bears risk and control, compare cost and flexibility, then conclude for the company's situation.

Understand Hybrid Finance, Leasing and Other Methods

Companies do not only use plain shares and plain loans. Many use hybrid finance, which has some features of debt and some of equity. The aim is usually a lower cost now, or a better fit with the company's risk and growth.

A convertible bond pays interest like a loan. The holder can later exchange it for a set number of shares, at a set conversion ratio, on set dates. Because of this option, investors accept a lower coupon than on a similar plain bond. If the share price rises, the holder converts and the company's debt turns into equity. If it does not, the bond is repaid at maturity (redemption). A warrant is different. It gives the holder the right, but not the duty, to buy new shares at a fixed exercise price before an expiry date. Warrants are often attached to a bond or loan as a "sweetener" and can be traded separately. If exercised, the company receives fresh cash. A converted bond brings no new cash; it just removes the debt.

Leasing lets a company use an asset without buying it. The lessor owns the asset and the lessee pays rentals. In a finance lease, the lease runs for most of the asset's life, the lessee bears maintenance and most risks and rewards of ownership, and the contract usually cannot be cancelled. In an operating lease, the term is shorter than the asset's life, the lessor often bears maintenance and the risk of obsolescence, and the lessee can often return the asset. Hire purchase is a purchase by instalments. The buyer uses the asset at once and becomes owner after the last payment, often with a nominal final amount.

Venture capital and private equity provide equity (or equity-like) funding to unquoted companies, often young or growing ones. The investor takes a share stake, often seeks board representation, and plans an exit through a flotation, a sale to another company, or a buy-back. This is high risk, so investors expect high returns. Securitisation pools income-producing assets, such as loans or receivables, and sells claims on their cash flows to investors through a special purpose vehicle. The company gets cash now and moves the assets off its balance sheet to the extent the transfer qualifies for that treatment.

For the exam, always judge each method on the same points: cost, risk, control, flexibility, tax, effect on gearing and cash flow, and effect on existing shareholders (dilution).

Key rules to remember

Conversion ratio: Number of shares per bond = Nominal value of bond ÷ Conversion price; Use the conversion price stated in the question. Check whether it is set per bond or per share.
Conversion value: Conversion value of one bond = Share price × Conversion ratio; Compare with the bond's straight value and redemption value. A holder converts if conversion value is higher than redemption value.
Conversion premium: Premium = Market price of bond − Conversion value; Premium per bond; divide by conversion value to give a percentage if asked.
Floor value of a convertible: Floor value = PV of interest and redemption at the rate for a similar non-convertible bond; The market price should not fall far below this. The excess over floor value is the price of the conversion option.
Warrant exercise payoff: Payoff per share = Share price − Exercise price, if positive; otherwise 0; Exercise only if the share price at exercise is above the exercise price.
Lease versus buy: Compare PV of after-tax lease rentals with PV of after-tax cost of buying, discounted at the after-tax cost of borrowing; Choose the lower present value of cost. Include tax allowances and the scrap value when buying.
Simple annual interest-rate comparison: Annual cost of instalment credit ≈ solve for r in: Cash price = PV of instalments at r; Use trial rates or interpolation. A flat rate understates the true cost because the balance falls over time.

How to solve Hybrid Finance, Leasing and Other Methods questions

Use this method for any question on hybrids, leasing or other funding. It works for both MCQs and written answers.

1Identify the instrument and its basic terms: who pays what, when, and who owns the asset or shares.
2State the debt-like and equity-like features. For a convertible, note the coupon, conversion terms and redemption. For a lease, note the term, who bears maintenance and risk, and ownership at the end.
3Do any required calculation: conversion ratio, conversion value, premium, floor value, or present value of lease versus purchase. Show the formula first, then the working.
4Assess the effect on the company: cost, cash flow, gearing, dilution of existing shareholders, control, and tax.
5Assess the effect on the investor or provider: return, risk, security, upside and exit route.
6Compare with at least one alternative, such as a plain bond, a rights issue or a bank loan.
7Conclude clearly for the company in the question, and state any assumptions such as tax rate or discount rate.

Quickest way: Feature table in five lines

When to use it: Use when an MCQ or short question asks you to choose the right instrument or classify a lease.

Ask first: is there an option to get shares? If yes, it is a convertible or warrant. Bond converts and cash does not come in; warrant exercise brings cash in.
Ask who owns the asset at the end. If the user becomes owner by paying instalments, it is hire purchase.
For leases, check the term against the asset's life and who bears risks. Most of the life and the lessee bearing risks means a finance lease.
For unquoted growth firms taking equity with an exit plan, think venture capital or private equity.
For selling a pool of loans or receivables to raise cash, think securitisation.

Common mistakes in Hybrid Finance, Leasing and Other Methods

Saying converting a bond raises new cash for the company.
Students mix up convertibles with warrants and rights issues.
Fix: On conversion, debt is replaced by shares and no cash comes in. Cash comes in when a warrant is exercised, because the holder pays the exercise price.
Calling a lease a finance lease just because it is long.
Students focus on length alone.
Fix: Look at the share of the asset's life covered and who bears the risks and rewards of ownership. Substance matters more than the label.
Forgetting dilution when discussing convertibles and warrants.
Students only discuss the lower interest cost.
Fix: Always mention that conversion or exercise issues new shares, which can dilute earnings per share and control of existing shareholders.
Ignoring tax when comparing lease and purchase.
Students compare raw rentals with the purchase price.
Fix: Use after-tax cash flows. Allow for the tax relief on rentals or on depreciation allowances, and discount at the after-tax borrowing rate.
Treating hire purchase and a finance lease as identical.
Both let the user pay over time.
Fix: Under hire purchase, the user becomes owner at the end by paying the final instalment. Under a lease, ownership normally stays with the lessor unless the contract says otherwise.
Giving only advantages of venture capital.
Students focus on access to funds.
Fix: Also state the cost: high required return, loss of control, board seats, covenants, and the pressure for an exit.

Worked examples

Example 1

A company has issued a convertible bond of nominal value ₹1,000, convertible into ordinary shares at a conversion price of ₹250 per share. The current share price is ₹280 and the bond trades at ₹1,250. Find the conversion ratio, the conversion value and the conversion premium per bond.

Show the solution

Conversion ratio = Nominal value ÷ Conversion price = 1,000 ÷ 250 = 4 shares per bond.
Conversion value = Share price × Conversion ratio = 280 × 4 = ₹1,120.
Conversion premium = Market price − Conversion value = 1,250 − 1,120 = ₹130.
As a percentage of conversion value: 130 ÷ 1,120 = 11.6% (to one decimal place).

Answer: Conversion ratio is 4 shares per bond, conversion value is ₹1,120 and the conversion premium is ₹130 per bond (about 11.6% of conversion value).

Example 2

A company can buy a machine for ₹5,00,000 or lease it for 3 years at ₹1,80,000 a year paid at the end of each year. Ignore tax. The company's borrowing rate is 10% a year and the machine would have no resale value after 3 years. Which option is cheaper in present value terms?

Show the solution

Annuity factor for 3 years at 10% = (1 − 1.1^−3) ÷ 0.1.
1.1^3 = 1.331, so 1.1^−3 = 0.751315. Then (1 − 0.751315) ÷ 0.1 = 2.48685.
PV of lease rentals = 1,80,000 × 2.48685 = ₹4,47,633 (rounded to the nearest rupee).
PV of buying = ₹5,00,000, since there is no resale value and no tax.
Compare: 4,47,633 is less than 5,00,000.

Answer: Leasing is cheaper by about ₹52,367 in present value terms, so lease the machine, on this cost basis alone. Also consider maintenance, flexibility and the effect on gearing.

Exam tips

For "discuss" questions, give a balanced view for both the company and the investor, then end with a conclusion.
Show the formula and each step in calculations, even for simple conversion ratios. Marks are given for method.
In MCQs, separate convertible bonds (no new cash on conversion) from warrants (cash on exercise) before reading the options.
When comparing lease and purchase, say whether you use after-tax cash flows and which discount rate you use.
Link the method to the company: a start-up suits venture capital, a stable firm with spare asset capacity may suit securitisation.

Practice questions from Structure and methods of financing a company

Hybrid Finance, Leasing and Other Methods in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsDebt Finance, Leasing and Hybrid Instruments

Hybrid Finance, Leasing and Other Methods: frequently asked questions

What is the difference between a convertible bond and a warrant?

A convertible bond is a loan that the holder may exchange for shares, so conversion removes debt and brings no new cash. A warrant is a right to buy new shares at a fixed price, so exercise brings cash into the company. A warrant can exist separately from any loan.

What is the difference between a finance lease and an operating lease?

In a finance lease the lessee has the asset for most of its life and bears most risks and rewards of ownership. In an operating lease the term is shorter, the lessor usually keeps the main risks, and the lessee can often hand the asset back. Judge by substance, not by name.

Why do investors accept a lower coupon on a convertible bond?

The conversion option has value, because the holder gains if the share price rises. The investor pays for this option by taking a lower interest rate than on a similar plain bond.

How is hire purchase different from leasing?

In hire purchase the user pays instalments and becomes owner at the end, often after a small final payment. In a lease the lessor stays the owner, and the lessee only pays rentals for use of the asset.