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Finance structure, or financial structure, is the way that a company's assets are financed. Finance structure is shown on the right side of the company's financial balance sheet. The financial situation of a company is listed there, beginning with equity capital and then listing the liabilities from long-term liabilities such as bank loans to short-term liabilities such as money that is owed by customers.
The finance structure of a company is important because it shows at first sight how healthy a company is. The equity capital should account for the greatest part of a company’s financial means. If a company has only a small amount of equity capital, it can get into problems with interest payments for the loans. When a company needs to pay high interest rates, its liabilities increase without having its assets increase. The company is then in danger of debt overload.
Business partners of the company in question are interested in its finance structure as well. They want to know if the company will be able to pay for goods and services in the future. For that reason, companies have to make their balance sheets public. Any other company interested in developing a business relationship with the company can thus look into its finance structure. The inquiring company can evaluate the other company’s ability to meet future financial obligations.
Banks will look into the financial structure of a company, too, when the company asks for a loan. When the share of equity capital amounts to a great part of the overall capital, the bank likely will grant a loan. On the other hand, if the company already has a high percentage of liabilities on the finance structure side of the balance sheet, it probably will not get another loan.
It should be the interest of every company to have a healthy finance structure. It also should be maintained over the long term. If a company should come into the situation of debt overload, it is likely to become insolvent.
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