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Tesco is a global grocery market leader and the leading retailer in UK. It is one of the world's largest food retailers and is a public limited company. Tesco not only sells food products but also non-food products such as clothing, electronics and cosmetics. Also, Tesco has developed its business by introducing car insurance, mobile contracts and home mortgage.
Tesco has been developed so much that we can even see stores in different formats across UK.
Tesco One stop
The two sources of finance which it uses to help fund for its business and why it uses them:
Once a business is established and starts to make investment on projects, expansion, research development and introduction of new products the day to day savings and retained profits are less likely to finance them. So, they require different sources of finance to cover their cost.
For example central and local governments rely heavily on tax receipts for financing capital investment projects while charities rely on grants, loan and voluntary services.
Choosing the right finance:
Amount of money required and repaying it back- It's very essential to understand that large amount of money is not available through some sources or some sources don not provide flexibility for a large amount. So, plans should be made for repaying a certain sum of money or else it leads to close down.
The cheapest option- The cost of finance is normally measured in terms of extra money that needs to be paid to secure the initial amount. The most typical cost is the interest that has to be paid along with the borrowed amount.
Before choosing the finance, most companies go for the cheapest option which is with less interest or fixed interest charged.
Amount of risk involved - Projects leading to less chance of profit are more risky than the one that does. Big finance companies are less likely to provide finance if it's a higher risk business project unless there is some sort of guarantee that their borrowed money will be returned.
Length of time for the requirement of finance- Good entrepreneur's judge whether the finance required will be short term, medium term or long term. Therefore it's very essential to understand whether the business requires finance for covering day to day activities or for large projects with long period of time.
Fixed vs. floating rate borrowing- Many lenders offer the borrower the choice of fixed or floating rate interest. Fixed rate borrowing is very expensive as it provides certainty to the firms but lenders may lose out if interest rate increases. Floating rate borrowing is variable and cheaper but carries more risk to the borrower as interest rates can increase which they might find it hard to replay it back.
Why does a company need finance for?
Large companies such as Tesco, which is British based supermarket operating overseas is growing very quickly and has opportunities for entering the undeveloped grocery markets requires huge sum of money to finance their investments.
Reasons for raising the finance:
For expanding stores on undeveloped grocery market areas
For launching new products
For research and development
To cover the cost
Why Tesco raising finance
The newspaper article explain the plans about Tesco expansion of superstores.
"Tesco plans huge expansion of superstores"
The key sources of finance that Tesco use:
Sale and lease back deal:
Sale and lease back deal of the assets- This is a source of finance where companies can use the assets for most of its useful economic life for regular lease payments and has the option to buy or return back at the end of the term to its owners.
Assets can be used as if it was owned.
More cheaper form of financing than a loan to buy an asset.
Often have the option to buy or return back to its owners at the end of the term.
Must pay to maintain and repair the asset.
Sometimes the cost for repairing the value exceeds the value of the asset.
Assets are never owned at the end of the lease.
In this article, we have found how Tesco and HSBC raised their finance through sale and lease back deal. This is a key source of finance because large firms can benefit it a cheaper form of financing to buy the asset.
"Tesco agrees sale and leaseback deal"
Tesco has raised more than £950 million after agreeing a sale and lease back deal for 41 of its stores. Britain's biggest supermarket chain said that the deal was a part of on going programme to release value from its UK property portfolio, with stores averaging a net yield of 4.9 percent. In completing the deal, Tesco is following a number of other companies in realising the value of property states by selling to investors and agreeing and agreeing to lease them back on a long term basis. Last year, HSBC made several hundred million pounds after financing the buyout of its London headquarters before selling the building again for a higher price when the original buyer ran into difficulties.
Share capital - These are funds raised by issuing shares in return for cash or other considerations.Â The amount of share capital Tesco has can change over time because each time Tesco sells new shares to the public in exchange for cash, the amount of share capital will increase. Share capital can be composed of both common and preferred shares.
Authorised Share Capital is also referred to, at times, as registered capital. This is the total of the share capital which a limited company is allowed (authorized) to issue to its shareholders.
Issued Share Capital is the total of the share capital issued to shareholders.
Called up Share Capital is the total amount of issued capital for which the shareholders are required to pay.
Paid up Share Capital is the amount of share capital paid by the shareholders.
Other sources of finance you could use to start up a business:
Bank loan - This is where you borrow from the bank for a period of time and then you pay it back with interest.
Personal Savings - This is your own money which you have saved up and might have to use if you can't persuade anyone to lend you the money to invest in the business.
Share issue -