The Hidden Truth About Business Funding
When people imagine how companies get money, they often picture investors writing big checks in exchange for shares.
But the truth is more practical — and less glamorous.
Most small and medium-sized businesses around the world don’t rely mainly on shareholders.
They grow using borrowed money, through loans, supplier credit, or overdraft facilities.
Understanding how capital is raised — and the difference between equity capital and loan capital — can help you structure your own business more strategically, whether you’re in Europe, Asia, or anywhere else.
1. Equity Capital — Money from Ownership
Equity capital is money invested by the owners of the business (the shareholders).
In return, they receive shares — pieces of ownership.
It’s powerful because:
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It doesn’t need to be repaid like a loan.
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It increases your business’s credibility when raising other forms of finance.
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It shows commitment from the founders and early investors.
However, there’s a trade-off:
You lose part of your ownership and future profits.
Equity is permanent money — once shares are sold, you can’t just “give them back” when things change.
2. Loan Capital — Money from Creditors
Instead of selling ownership, many businesses borrow.
This can come from:
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Banks and financial institutions
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Suppliers who allow you to pay later (trade credit)
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Even the shareholders themselves (who lend money to their own company)
For small businesses, loans are often the fastest and most flexible way to get funding.
But banks will usually want something in return — security, a form of protection if the company cannot repay.
3. Why “Security” Matters
When a company borrows money, the lender wants to know:
“If you fail to repay, what can I take instead?”
That’s where security comes in.
It can take many forms:
By giving security, a company can negotiate better loan terms, such as lower interest rates or longer repayment periods.
4. Real-Life Scenario
Imagine Sara and Edoardo start a digital design company.
Sara invests $100,000, Edoardo invests $50,000.
Now they ask:
“Should we invest all this as share capital, or lend part of it to the company?”
If they invest everything as equity, they’ll be full owners — but their money will be locked inside the company.
If they lend part of it, say half each, they’ll be both owners and creditors.
This gives flexibility:
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They can charge interest.
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Their loan can be repaid before profits are distributed.
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But if the company fails, they rank behind secured creditors and ahead of shareholders.
There’s no universal answer — it depends on cash flow, risk appetite, and tax implications.
What matters is understanding that capital structure is a tool.
How you build it shapes your business’s resilience.
5. The Global Perspective
Whether you’re in the EU, the Middle East, or Asia, the principles are similar:
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Equity gives freedom but dilutes control.
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Debt adds risk but maintains ownership.
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Security helps balance both sides, protecting lenders while unlocking opportunity.
The smartest entrepreneurs learn to combine them strategically.
They don’t just ask, “How do I get money?”
They ask, “How do I build a capital mix that gives me growth and protection?”
Part 2 — Floating Charges Explained: How Banks Protect Their Loans Without Owning Your Business
1. The Concept: Security That “Floats”
When a business borrows money, the lender wants a backup plan — a legal right to claim certain assets if the borrower cannot repay.
Sometimes, that protection is tied to a specific item, like an office building or a piece of machinery. That’s called a fixed charge.
But businesses don’t just own fixed assets. They have changing assets — things like inventory, customer payments, or raw materials that constantly move in and out of the company.
So how can a lender secure something that doesn’t stay still?
That’s where the floating charge comes in.
A floating charge is like a net that floats over a class of assets — assets that change daily — and only “locks down” when the company fails to pay or enters liquidation.
2. The Everyday Example
Let’s say your company sells electronics.
You buy stock every week and sell it every day.
If a bank took a fixed charge over that stock, you wouldn’t be able to sell a single phone without permission — which makes no sense for running a business.
So instead, the bank takes a floating charge over your inventory and receivables.
You can still buy, sell, and collect payments in the normal course of business.
But if you stop trading or go insolvent, the floating charge “crystallizes” — meaning it becomes fixed, and the bank gets priority over those assets.
3. Floating vs. Fixed: Why It Matters
From the lender’s point of view, fixed charges are stronger — they attach directly to a specific asset and give full control if things go wrong.
Floating charges are more flexible, but weaker in legal priority.
Here’s what happens when a company is wound up (closed due to insolvency):
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Fixed charge holders are paid first from the sale of those secured assets.
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Costs of liquidation (e.g. liquidator’s fees) come next.
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Preferential creditors, like unpaid employees, get a share.
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Only after that, floating charge holders get what’s left.
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Finally, unsecured creditors (suppliers, customers) get whatever remains — often nothing.
That’s why banks prefer fixed charges whenever possible, and floating ones only when flexibility is essential.
4. Floating Charges Over Book Debts
Now, let’s talk about book debts — money your customers owe you.
For many service-based businesses, this is one of the most valuable assets they have.
Example:
A marketing agency finishes a project worth $200,000, but clients pay after 60 days.
Those unpaid invoices are book debts.
The bank may say:
“We’ll lend you money now, and in return, we’ll take a charge over your future customer payments.”
Here’s the catch:
If the company can freely collect those debts and spend the money however it wants, the charge isn’t really “fixed.”
It’s floating, because the business keeps control.
For a charge over book debts to be fixed, the collected payments would have to go into a blocked account — one the company can’t use freely.
Most businesses would never agree to that, since it limits their cash flow.
So, in practice, most book-debt charges are floating.
5. Global Relevance: Why Entrepreneurs Should Care
This concept isn’t just British or European — it applies in most modern legal systems.
In Asia, the EU, and the Middle East, lenders often use similar forms of security interests to protect loans.
If you plan to borrow for your business, here’s what to remember:
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Fixed charges give lenders full control but limit your flexibility.
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Floating charges give you freedom to trade, but less protection for the lender.
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Both affect your company’s credit rating and borrowing capacity.
A smart founder doesn’t just sign the bank documents — they understand the difference.
Knowing how your assets are charged means knowing how much control you still have over your own business.
Reflection
In business, control is a form of capital.
A floating charge lets you keep that control — until things go wrong.
It’s a silent agreement between risk and freedom.
The art of entrepreneurship is learning how to use that freedom without floating too far from stability.
Part 3 — The Legal Priority Game: Who Gets Paid First When a Business Fails
1. When Things Go Wrong
Every business runs on optimism — but the law runs on preparation.
When a company becomes insolvent, not everyone gets their money back.
There’s an invisible priority ladder that decides who gets paid first, and who must accept a loss.
Understanding this order isn’t just for lawyers.
If you’re a founder, investor, or lender, it tells you how safe your money really is.
2. The Priority Ladder Explained
When a company’s assets are sold after failure, the money doesn’t go to everyone equally.
It’s divided according to legal priority classes.
Here’s how the ladder usually looks:
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Fixed Charge Holders —
They get first claim on the specific assets used as security (for example, a property or vehicle).
→ Their risk is lowest because they have direct control over the collateral.
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Liquidator’s Costs —
The people legally appointed to close the company get paid next.
→ Without them, no one gets anything.
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Preferential Creditors —
Usually, employees owed salaries or government taxes due.
→ Modern insolvency law tries to protect individuals before institutions.
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Floating Charge Holders —
These are typically banks who took security over assets like inventory or receivables.
→ They get paid after employees and liquidation costs.
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Unsecured Creditors —
Suppliers, freelancers, small businesses, and customers who prepaid for goods.
→ They usually receive only a small percentage — if any.
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Shareholders —
They are last in line.
If something remains after everyone else is paid, it goes to them — but usually, nothing does.
3. Why This Order Exists
The logic behind this hierarchy is risk and fairness.
Those who took the least risk (by asking for security or fixed assets) are protected first.
Those who accepted more risk — like suppliers or small investors — are last.
It’s a reminder that in business law, the paper you sign decides your position, not just your trust in the other party.
4. The “Floating Charge Trap”
Many founders don’t realize that floating charges — while flexible — can lose their power when insolvency hits.
A portion of the assets under floating charge must be set aside for unsecured creditors, under insolvency rules adopted in the UK, EU, and similar systems globally.
This ensures small creditors get something back, even when the main lender is a large bank.
For entrepreneurs, this means:
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Floating charges are useful but weaker.
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If you’re giving one to a bank, know what assets it covers.
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If you’re investing in a company, know if someone else already holds a floating charge — because it may push you to the bottom of the queue.
Q1: What best describes equity capital in a business?
Money invested by owners or shareholders in exchange for ownership (shares).
Money borrowed from banks that must be repaid with interest.
Grants from governments or charities that never need repayment.
Q2: What is a floating charge in business finance?
A security interest over changing assets like inventory or receivables that becomes fixed if the company defaults.
A personal guarantee from the director to repay all company debts.
A fixed mortgage over a company’s property or building.
Q3: In case of insolvency, who gets paid first from company assets?
Fixed charge holders — those with security over specific assets like property or vehicles.
Unsecured creditors such as suppliers and freelancers.
Shareholders who own company equity.
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