Article 7 — Funding and Capital Structure: Choosing the Right Money for Growth
1. Why Every Business Needs Funding
Every idea eventually meets a moment where ambition costs money. Equipment, marketing, staff — each step forward needs capital.
Funding isn’t just about cash; it’s about control, risk, and ownership. When you take money, you’re not only adding fuel — you’re trading influence.
Startups must learn to ask not only how much but what kind of money they want.
Funding Ladder
The Funding Ladder shows how most businesses grow financially:
Bootstrapping 🟦 – using your own savings; total control, slow growth.
Bank Loan 🟦 – predictable cost (interest) but legal obligation to repay.
Angel Investment 🟩 – early partners trading cash for shares.
Venture Capital 🟩 – professional investors funding rapid scaling.
IPO 🟧 – public markets; maximum capital, minimum privacy.
Each step adds fuel — and reduces freedom.
2. Internal vs External Funding
Funding sources divide into two families: internal (self-generated) and external (borrowed or invested).
Source Type Examples Pros Cons Internal | Savings, retained profit, family & friends | Keeps control | Limited capital External | Bank loans, angels, VC, crowdfunding | Larger funding potential | Shared control, external pressure
The smartest founders mix both — starting with internal funds to prove traction, then using external capital to scale faster.
3. Capital Structure — The Company’s Financial DNA
Capital structure is how your business is financed — the ratio between debt (borrowed money) and equity (ownership capital).
Two Main Components
Debt – cheaper but increases repayment pressure.
Equity – safer but dilutes ownership.
The key is balance: too much debt makes you fragile, too much equity gives away control.
Think of your capital like a bar split between blue (debt) and green (equity). Most healthy small businesses stay near 40 % debt / 60 % equity. Tech startups often use 0 % debt until revenues stabilize. The right structure depends on how predictable your income is.
Capital Structure Bar
4. Debt Financing — Borrowing to Grow
When you borrow money, you keep ownership but accept risk.
Method Example Advantage Danger Term Loan | Bank loan for 5 years | Low cost | Fixed repayments Credit Line | Short-term working capital | Flexible use | Interest fluctuations Asset Finance | Lease of equipment | No upfront cost | Collateral risk
💡 SweetBite Bakery Example
Took a £20 000 bank loan to buy ovens. Monthly interest: £300. It kept 100 % ownership and paid off debt in 3 years.
Lesson: Use debt for tangible assets that generate cash fast.
5. Equity Financing — Sharing to Scale
Equity means selling ownership in exchange for capital and mentorship. It suits digital startups with high risk and delayed profits.
Stage Investor Type Typical Share Given Up What They Add Seed | Angel | 10 – 25 % | Experience, network Series A | VC Fund | 20 – 35 % | Capital, credibility Later Stage | Institutional Investors | 10 – 20 % | Stability, exit route
TechNova Solutions Example
Raised £100 000 from angels for 20 % equity. Used funds for R&D and marketing. When valuation tripled, founder still owned 80 %.
Lesson: Equity costs control, but can multiply value.
Funding Balance Triangle
Each funding decision shifts the triangle between:
Control 🟦 – how much power you keep.
Risk 🟥 – how much obligation you bear.
Return 🟩 – how much wealth you can create.
You can’t maximize all three. The art is choosing which matters most right now.
6. SweetBite vs TechNova — Funding Strategies
Company Stage Main Funding Strength Risk SweetBite Bakery | Local expansion | Bank loan | Ownership retained | Repayment pressure TechNova Solutions | Product scaling | Angel equity | Fast growth | Dilution of control
Observation: Both are profitable — but one optimizes stability, the other speed. Neither is “right” — only “right for their model.”
7. Finding the Right Balance
Follow the 3 C Rule:
Capacity – Can your cash flow handle debt?
Control – How much ownership are you willing to give up?
Confidence – Do investors believe your numbers?
Plot these answers on the triangle. The intersection is your optimal funding path.
8. Founder’s Funding Checklist
Know your break-even before seeking money.
Start internal, add external when traction proves potential.
Compare cost of capital (interest % vs equity % given).
Keep one version of the truth — clear metrics, clean books.
Build relationships before you need cash.
Capital seeks clarity. The clearer you are, the cheaper it becomes.
9. Takeaway
Money shapes ownership. Every pound raised rewrites your story — so raise intentionally.
A well-built capital structure lets you grow without gambling control. Debt is a tool; equity is a partnership; both are levers.
