Finding the Right Balance: Understanding Capital Structure

By: Carlos Herreman

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November 1, 2025 at 1:09 PM PDT

Every small business, whether a local retailer or a growing service firm, faces the same fundamental question: how should we finance our growth? The answer lies in your capital structure—the balance between debt and equity that fuels operations, investment, and expansion.

Getting this balance right is crucial. Too much debt can burden your business with interest payments and increase the risk of financial distress. Too little debt, on the other hand, can mean missing out on opportunities to expand, modernize equipment, or hire new talent. The key is finding the point where the cost of capital is lowest and your firm’s value is maximized.

An effective capital structure gives your business financial flexibility—the ability to act quickly when opportunity knocks or when challenges appear. A company with access to affordable credit and a strong equity base can weather downturns, recover from setbacks, and move fast when new ventures emerge. Financial flexibility allows you to protect your employees, maintain customer trust, and stay competitive even during uncertain times.

At the same time, the way you structure financing affects how others view your business. Lenders look at leverage to assess your risk. Investors and partners consider your debt levels when judging the stability of your earnings. Even within the business, too much volatility in net income can make planning difficult and strain confidence. Managing leverage carefully helps create steadier

performance and stronger relationships with both creditors and investors.

For small-business owners, it’s also important to think about control. Raising equity means bringing in new owners who share in decision-making and profits, while using debt allows you to keep control—but at the cost of regular repayment obligations. Each path carries trade-offs, and the right mix depends on your goals, risk tolerance, and stage of growth.

Ultimately, there is no single formula. The optimal capital structure is unique to every business and should evolve as your company grows. Regularly reviewing your financing mix—especially before major expansions or during market shifts—can help ensure your business remains resilient, profitable, and positioned to take advantage of future opportunities.

A thoughtful capital structure isn’t just about numbers. It’s about protecting your independence, preserving stability, and building the foundation for lasting value.