Sources of Finance for Bubbly-Bakery: Internal vs. External Funding

This report provides an analysis of funding sources suitable for the Bubbly-Bakery, focusing on both internal and external finance options. It begins with an introduction highlighting the importance of selecting the right funding source based on business plans and needs. The main body evaluates various funding sources, categorizing them into short-term, medium-term, and long-term options, and further dividing them into internal and external sources. External sources discussed include bank overdrafts, venture capital, lease financing, hire purchase, equity shares, and debentures. Internal sources encompass trade credit, retained profits, and sales and leaseback arrangements. The report then analyzes the most beneficial sources for the Bubbly-Bakery's afternoon event, recommending the use of trade credit and retained profits. The conclusion emphasizes the importance of a thorough analysis of each funding source's advantages and disadvantages to mitigate potential risks. The report references several academic sources to support its findings.

Planning for Growth -
source of finance

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
Evaluating potential sources of funds for the Bubbly-Bakery...............................................3
Analysing the best sources of funding for the Bubbly-Bakery for its afternoon event..........7
CONCLUSION..........................................................................................................................7
REFERENCES...........................................................................................................................8

INTRODUCTION
For the running the business effectively it is very essential to obtain the fund from the
right source having least risk over the business. The type of funding required is based on the
business plan and for how long it is required. This report provides an understanding about the
different sources of fund with their pros and cons and which source is most suitable for the
business.
MAIN BODY
Evaluating potential sources of funds for the Bubbly-Bakery
There are different sources of funds but the all the sources have been bifurcated into
two, that is, internal and external sources which is further bifurcated into short term, medium
term and the long term. A detailed description is given below.
EXTERNAL SOURCES
Short term finance
Bank overdraft: It is basically the facility which is being provided by the banks to its
customers (Campbell, 2017). In this, customers can make a withdraw of the amount greater
than the balance available in the account with a certain limit.
Advantages Disadvantages
 There is no requirement of collateral
or other security.
 It is much flexible and adjustment in
the amount can be made as per the
need.
 The interest rate is mainly variable
and greater than the bank loans.
 Chances of cash flow problem might
arise if the bank asks for the
repayment in the short notice.
Venture capital: In this type of funding, fuds are provided to the new business or for
expansion of it. It mainly occurs from the venture capital firms which is majorly specialized
in high risk financial portfolios. It is in exchange of the equity in the company.
Advantages Disadvantages
 It provides tax benefit to the
investors.
 Requires clear exit strategy for the
investors.
 Dilution of the control with the

 Provides valuable guidance along
with expertise.
ownership.
 Complicated process.
Medium term sources
Lease financing: It is a contractual agreement in which one party is the owner of asset and
the other pays for the right of using that asset for a specific period. (Ferri and Lipari, 2019) At
the end of the time frame, the asset is returned back to the actual owner.
Advantages Disadvantages
 Lessee can acquire the asset at the
low investment.
 Lease rental is allowed as deduction
while calculating taxable amount.
 The risk of asset obsolescence is
taken by lesser.
 It might impose imposition of
certain restriction over the usage of
the assets.
 Business will be affected if the lease
is not renewed on time.
 Lessee can never become the owner
of the asset.
Hire purchase: It refers to purchasing an asset and paying the cost over a period of time in
instalments. Mainly, certain percentage is being paid as down payment and the interest is
required to be paid on instalment.
Advantages Disadvantages
 Convenient in making payment as
buyer can pay in instalment.
 It is useful for small traders as assets
can be purchased on instalment
basis.
 Asset can be repossessed if the
payment is not made on time.
 Not payment affects the credit score
of the buyer.
 Interest might lead the transaction to
cost more.
Long term sources
Equity shares: It represents the actual ownership of the business. The amount dividend to be
paid is not fixed and bears higher risk for higher reward (Mocking, Möhlmann and Palali,
2016). Liability is limited to the capital contributed.

Advantages Disadvantages
 Best suited for businesses who are
willing to take greater risk for the
higher return.
 It will serve as the permanent capital
which is not required to be returned
back.
 It involves lot of procedures for
raising funds through shares.
 Issuing the further such shares will
lead to dilution of the voting powers
and the earnings of the shareholders.
Debentures: It is an important source for the purpose of raising long term funds. It is fixed
interest-bearing instrument, and is an acknowledgement that the organization has borrowed
the amount which will be repaid in future.
Advantages Disadvantages
 It is preferred by the investors
interested in the fixed income with
the lower risk.
 It is suitable for the businesses
where the sales and the total
earnings are stable.
 It puts permanent burden over the
earnings of the organization which is
possessed as the risk.
 It also reduces the borrowing
capacity of the business entity.
 Risk increases when the earnings of
the company fluctuates.
INTERNAL SOURCES
Short term finance
Trade credit: In this, credit is given by one trader to another in regard to the purchase and
sale of products and services (Mamo, Seychell and Grima, 2019). It facilitates purchasing of
supplies without any requirement of making immediate payment.
Advantages Disadvantages
 Trade credit can be given easily if
the credit worthiness of the is
already known to the seller.
 For meeting the sudden increase in
demand of the product, it can be
 Might not offered cash discounts.
 Easy availability might indulge the
company in overtrading making the
company more riskier.
 It is a costly source as compared to

used.
 It doesn’t create any charge over the
assets of the company while
providing funds.
other sources.
Medium term sources
Retained profit: It is the earnings which is not distributed by the company as dividend. It is
used for the purpose of business growth and expansion needs (SHROTRIYA, 2019).
Advantages Disadvantages
 It is the permanent source of finance
for the firm.
 Being generated internally, it
provides greater degree of freedom
and flexibility on its usage.
 Excessive retention of earnings
might disappoint the shareholders.
 It is a uncertain source of finance as
business fluctuates.
Long term sources
Sales and leaseback: It refer to when the firm looks to make a sell of its building which is
currently it owns and occupies to the buyer who immediately becomes the owner of it
(Zhaofeng, 2016). It is an alternative to bank financing.
Advantages Disadvantages
 Rental payments are tax deductible.
 It helps in generating great amount
of money.
 The selling company can still enjoy
the benefit arising from eth sage of
the asset.
 Any future appreciation in the value
of the asset is not available to the
seller.
 It does not guarantee that the lease
will be renewed in the future.
Analysing the best sources of funding for the Bubbly-Bakery for its afternoon event
Based on the evaluation of the different sources of fuds which is being available for
procuring the funds, it is beneficial for the company to make use of internal sources of
finance for arranging the teas event for the local dignitaries. It can use trade credit and the

retained profits. Trade credit will be easily available to it as it is well established bakery in
West London which will highlight its credibility to the traders. Also, it is very easily and
quickly made available and does not create charge over the assets of the company. Also,
utilizing the retained earnings is also can be a great source as it will not generate any liability
over the company which will help in reducing the financial burden and risk on the company.
Application of both of sources of finance will meet the financial requirements of the business.
It will also not affect the ownership, power and profitability of the company as well which is
not in case of other sources. Also, these sources is useful in both short term and medium term
as well.
CONCLUSION
It can be concluded that each source has its advantages and disadvantages which is
required to be properly analysed over taking the final decision otherwise, it can turn into
riskier situation for the company. Therefore, the Bubbly-Bakery should make use of trade
credit and retained profit source of finance for its afternoon tea event.

REFERENCES
Books and Journals
Campbell, B., 2017. Why Such a Focus on External Sources of Funds to Finance
Development?. Mondes en développement. (2). pp.77-92.
Ferri, G. and Lipari, F., 2019. Sustainable Finance Management. In The Rise of Green
Finance in Europe (pp. 79-93). Palgrave Macmillan, Cham.
Mamo, M., Seychell, S. and Grima, S., 2019. Sources of finance in the igaming industry: the
case of Malta. Scientific Programme Committee. p.530.
Mocking, R., Möhlmann, J. and Palali, A., 2016. Dependence on External Finance and SME
Survival. CPB Netherlands Bureau for Economic Policy Analysis.
SHROTRIYA, D. V., 2019. Internal Sources of Finance for Business Organizations.
Zhaofeng, L. I., 2016. Analysis on Sources of Finance and Difficulties in Raising Finance for
Small to Medium-Sized Companies. International Business and Management. 12(3).
pp.27-30.