The Funding Stack: How Fintechs Should Finance Each Layer of the Business

There is a gap in how founders are taught to think about financing. Accelerators, blogs and podcasts spend a lot of time explaining how to raise equity: the deck, the story and the dilution maths. Far less attention is given to capital architecture, or how to match each part of a business with the right type of financing.

For most software companies, this matters less because equity may be the main source of capital they need. For fintechs, it can make a major difference to how efficiently the company grows and how much dilution founders take along the way.

The principle is simple: finance each part of the business with capital that reflects the risk of that part. Equity is usually the most expensive capital a company can raise because it is permanent, dilutive and expected to generate venture returns. It is best used for risks that other forms of capital cannot easily finance. Will the product work? Will customers want it? Can the team execute? If the use of funds is more predictable, there may be a cheaper and more suitable form of financing available.

A useful way to think about this is to split the business into four layers, with a different financing instrument for each one.

Note: The four layers are not strictly sequential. Growth debt does not necessarily have to come before an asset-backed facility, or vice versa. The two can be used alongside each other, and many companies use all four types of financing simultaneously.

Layer one: the company. Instrument: equity. Product risk, team risk and market risk are the core questions at the company level. Equity is designed to absorb this uncertainty and can take the risk of a complete loss. The mistake is usually not raising equity. It is using equity to fund activities that could be financed more efficiently with another form of capital.

Layer two: the gap. Instrument: growth debt. From financing working capital to funding strategic growth initiatives, such as customer acquisition, market expansion, or M&A. It is generally sized based on the strength of the company, historical performance, and its investors. It should be viewed as a tool that is complementary to equity, but not a permanent source of capital. Unlike equity, it has to be repaid on a defined schedule.

Layer three: the assets. Instrument: asset backed facilities. This is where fintech starts to look very different from traditional software. When a company originates loans, advances receivables or funds assets that are expected to repay, it creates a pool of assets with measurable performance and risk. Credit markets are designed to finance this type of risk. A warehouse facility lends against the asset pool itself, often advancing 80 to 90% of eligible assets. The lender is protected through eligibility criteria, concentration limits and the company's first loss position. A forward flow arrangement goes one step further. A buyer agrees to purchase assets as they are originated, so those assets do not need to remain on the company's balance sheet.

The numbers show why this matters. Suppose a company wants to build a £50m loan book. If it funds the full book with equity, £50m of equity is tied up in assets that might generate a 12% yield. With an asset backed facility at an 85% advance rate, the company would need to contribute only £7.5m of equity as first loss, while the facility provides the remaining £42.5m. That leaves much more of the company's equity available for product development, hiring and customer acquisition. Put simply, equity tied up in a loan book is equity that cannot be used to grow the wider business.

Layer four: the franchise. Instrument: securitisation. At larger scale, usually once a company has a substantial asset base and several years of performance data, the loan book can become a capital markets product in its own right. Securitisation allows the company to sell different levels of exposure to the asset pool to lenders who focus on historical performance rather than the company's equity story. This can reduce the cost of funding and increase available capacity. Reaching this stage depends on evidence. Lenders and rating agencies want consistent, well documented performance data. That means the groundwork for securitisation starts much earlier, with how carefully the company tracks and reports the assets financed at the previous stage.

Three common mistakes can undermine this funding strategy. The first is using equity to fund predictable assets for too long. The second is taking asset backed financing before the assets have enough performance history. Warehouse facilities come with covenants, triggers and eligibility tests that rely on a clear understanding of asset performance. If that data does not yet exist, the structure can become restrictive. A better approach is often to test a small pool with equity first, build a track record, and then refinance it once there is enough data. The third mistake is mixing the roles of different instruments. Venture and Growth debt should not be sized like asset backed financing. Warehouse facilities should not be stretched to fund operating costs, and equity returns should not depend on leverage that belongs at the asset level. Each instrument works best when it finances the type of risk it was designed for.

There is a natural sequence to this. Equity proves the product. A small equity funded book proves the asset. A warehouse facility scales the proven asset. Forward flow or securitisation can then fund it at much greater scale. At each stage, the risk becomes more measurable and the capital can become cheaper. The founder's job is to build the evidence that makes the next form of financing available. The fintechs that scale efficiently are not necessarily the ones that raise the largest equity rounds. They are often the ones that use equity only where equity is truly needed.

A simple way to remember the framework is this: equity gives you room to take risk and be wrong. Debt works best when the underlying economics are already proving themselves repeatedly. Use equity to build the company. Use debt to scale what has become predictable.

This article was also published on the Viola Credit website.