Businesses that raise capital often start off by comparing debt financing vs equity financing. Both options can be a great way to access funding to grow your business and reach new heights. But how do you know which one is right for your business?
Both debt and equity financing can provide plenty of advantages, but they also carry potential risks which are important to understand.
In this article, we’ll help you compare debt vs equity financing. We’ll explain how both options work, what they offer, what the benefits and potential risks are, and how to decide which may be more suitable for your business.
What is debt financing?
Debt financing is when you borrow money for your business that you’ll pay back with interest over time. You receive the money upfront from a bank or other lender and then make regular payments until you’ve repaid the full amount.
The main benefit is that you keep 100% ownership of your business. The lender or person you borrow the money from won’t have any say in how you run your business. Your relationship with the lender will end once you’ve repaid the loan.
In the UK, bank loans make up a big portion of business debt – high street banks lent around £4.6 billion to SMEs in Q1 2025 alone. But businesses take on many other types of debt financing too.
Types of debt financing
What is equity financing?
Equity financing is when you sell shares in your business to investors in exchange for capital. Rather than borrowing money you’ll repay later, you’re bringing on partners who’ll own part of your company and share in its future success.
When you raise equity, your investors will become shareholders in your business. They’re essentially betting on your business growing in value so they can one day sell their shares for more than they paid (or receive dividends from your profits).
Unlike debt, equity investors don’t expect regular repayments. But they do expect your business to grow over time so they can eventually make a return. And depending on how much equity you sell, they may want a say in any major business decisions.
By the end of 2024, over 13,000 UK businesses were backed by private equity and venture capital investment. Smaller businesses were a little less active than the year before, raising £10.8 billion, but 2024 was still the fifth highest year on record for equity financing.
Types of equity financing
You could raise equity financing in several ways:
Angel investors: Get early-stage funding from high-net-worth individuals who believe in your business potential
Venture capital: Secure larger investments from professional firms, often targeting high-growth companies
Crowdfunding: Raise smaller amounts from many people online, either through equity or rewards
Family and friends: Receive initial funding from personal connections who support your vision
Private equity: Attract investment from firms that typically back established, profitable businesses
There’s also revenue-based financing, which provides growth capital without you having to give up equity. This could be an attractive middle ground if you want investment-style funding but prefer keeping full ownership of your business.
What’s the difference between debt vs equity financing?
Comparing equity financing vs debt financing is relatively straightforward. And understanding how they differ will help you choose the right option for your business.
Here’s how debt and equity financing compare across the factors that matter most to many UK businesses:
| Debt financing | Equity financing |
|---|
| Keep 100% of your business | Share ownership with investors |
| Fixed schedule with interest | |
| | Investors may influence decisions |
| Requires income/assets/credit history | Based on growth potential |
| Days to weeks for approval | |
| Interest rates of around 6-15% APR (est. August 2025) | Equity dilution plus future profit sharing |
| Must repay even if business struggles | Investors absorb losses if business fails |
| | |
Your business stage may influence your decision. For example, newer businesses with limited trading history may find equity more accessible. And established companies with predictable revenue may prefer debt’s lower long-term costs.
Building strong business credit could give you access to more debt options over time. Learn how to improve your business credit score to access more competitive rates and larger amounts of funding as you grow.
Is debt or equity financing better for your business?
Both debt and equity financing have advantages that suit different circumstances. So whether debt or equity financing is better for your business will depend on your specific situation, business stage, and growth plans.
Advantages of debt financing
Stay in control: You make all the decisions without needing investor approval, and the business remains yours
Predictable costs: Fixed repayment schedules can help with planning your cash flow, and you could deduct interest payments from your tax bill
Build credit history: Successfully repaying business debt could improve your credit score, opening doors to larger amounts and more competitive rates in the future
Faster access: Many types of debt financing can be arranged in days or weeks, which is much quicker than equity fundraising
Relationship ends: Once you’ve repaid the debt, you won’t have any ongoing obligations to the lender
Flexible options: There are lots of options to choose between based on your circumstances and needs, including invoice financing for immediate cash flow and lines of credit for more unpredictable needs
Potential risks of debt financing
Regular payment obligations: You’ll need to make payments regardless of how your business performs, so steady cash flow is important
Interest costs: You’ll need to pay interest on the amount you borrow, increasing the total amount you’ll repay
Eligibility requirements: Lenders typically want to see trading history and revenue, and they’ll sometimes ask for personal guarantees or business assets as security
Limited options for new businesses: Younger companies may find it harder to qualify for traditional business loans due to limited trading records and credit history
Credit impact: Missing payments could damage your business credit score and make future borrowing more difficult
Advantages of equity financing
No pressure to repay: Since investors don’t require paying back regularly, there’s no pressure to make monthly payments during tough times
Access to expertise: Many investors bring valuable experience, industry connections, and strategic guidance beyond just money
Larger funding amounts: The average UK equity deal is worth £4.65 million, much more than most debt options
Shared risk: If your business doesn’t work out, you won’t have to repay your investors
Credibility boost: Having respected investors onboard can open doors with customers, suppliers, and future funding sources
Potential risks of equity financing
Ownership dilution: You’ll own a smaller percentage of your business and have to share future profits with investors
Shared control: Depending on how much equity you sell, investors may want to be part of major decisions or hold seats on the board
Longer process: Equity fundraising typically takes 3-6 months, involving pitches, due diligence, and complex legal documentation
Ongoing relationship: Unlike debt, your relationship with equity investors can go on indefinitely
Higher long-term costs: If your business becomes very successful, the equity you’ve given away could be worth a lot more than the equivalent debt might have cost
Can you use debt and equity financing together?
Although far more UK businesses take out debt financing than equity, many businesses use both debt and equity financing strategically.
The approach you should take will depend on what you’re funding and when. For example, you might use equity finance for big growth initiatives that need major upfront investment. Or you might use debt financing to help with working capital and day-to-day cash flow management.
Some businesses start with equity finance to prove their concept and build initial revenue. Then they add debt as they become more established and creditworthy. But other businesses start off taking out small amounts of debt and gradually introduce equity finance as bigger growth opportunities emerge.
Hybrid options exist too. Mezzanine financing combines features of debt and equity, typically starting as a loan that can convert to equity under certain conditions. And revenue-based financing can provide growth capital with flexible repayments but no equity dilution.
Ultimately, you’ll need to match your mix of funding to your business stage and needs.
Wrapping up
Choosing between debt and equity financing is an important decision that may initially feel overwhelming. But it doesn’t have to be. Just remember that both offer advantages for different situations, and many successful businesses use both at different stages of their growth.
The important thing is to understand your current financial position, future plans, and comfort level with sharing control of your business or taking on debt you’ll need to repay. There are options designed for your specific circumstances, whether you’re looking for your first £20,000 or planning a £5 million expansion.
It’s also worth noting that many of your choices aren’t permanent. As your business grows and proves itself, you’ll gain access to new funding options and can adjust your approach. In fact, the businesses that thrive most are often those that remain flexible and choose the right funding for each phase of their growth.
FAQs
What financing options are available to new businesses under six months old?
New businesses may find it harder to find a willing lender due to limited trading history. But many young businesses can still consider Start Up Loans, invoice finance, asset finance, revenue-based financing, business credit cards, and merchant cash advances.
How do I choose between debt and equity financing if my business has limited revenue?
If your business has limited revenue, consider focusing on what you can realistically afford to repay compared to how much control you’re willing to share. Revenue-based financing could be a good middle ground, since it offers growth capital without giving away equity and repayments will be linked to your performance.
How do I calculate the true cost of debt versus equity?
Calculating the true cost of debt versus equity can help you make the right financial decision for your business. For debt, calculate the total interest you’ll pay over the loan term using our business loan calculator. For equity, consider the percentage of future profits and business value you’re giving up - if your business experiences huge growth, equity can be much more expensive long-term.
At what point should I consider equity financing versus sticking with debt?
You may want to consider equity when you need larger amounts than debt can provide (e.g. over £1 million), want to share business risk, or could benefit from investor expertise and connections. Consider sticking with debt if you want to stay in full control of your business, have predictable cash flow to manage repayments, and can access the amounts you need.
What’s better, equity financing vs debt financing for start ups?
Start ups often benefit from equity because investors are typically willing to take risks that traditional lenders aren’t, and there's no pressure to make monthly repayments while you’re growing your revenue. But revenue-based financing can offer similar benefits without giving up ownership if you have some traction, so that may be worth considering too.
Does equity or debt financing give you more control?
Debt financing gives you more control of your business since lenders don’t have a say in your operational decisions. But you’ll need to factor in repayments when making your decision. With equity, control depends on how much you sell and who you sell to, but investors often expect board seats or voting rights on major decisions.
What’s the ideal debt-to-equity ratio for my business?
A healthy ratio is typically between 1:1 and 2:1 (i.e. £1-2 of debt for every £1 of equity), but this varies by industry. Manufacturing and retail businesses often carry more debt, whilst technology companies typically rely more heavily on equity funding.
How long does it take to get approved for debt vs equity financing?
Debt financing typically takes days or weeks to get approved, with some options like invoice financing offering advances in as little as 24 hours. Equity financing takes longer, usually around 3-6 months from start to finish, involving pitching, extensive due diligence and legal processes.
Can I get debt financing with bad credit or no trading history?
You might be able to get debt financing with bad credit or no trading history, but your options are likely to be more limited. Start Up Loans don’t require a trading history, and some alternative lenders work with businesses that have poor credit. To access the widest range of debt financing options, you may want to consider focusing on improving your business credit score or think about revenue-based financing which looks at your current business performance rather than credit history.
What’s the difference between angel investors and venture capitalists?
Angel investors are usually wealthy individuals who invest their own money in early-stage businesses, offering smaller amounts but often more personal involvement. Venture capitalists are professional investment firms that manage other people’s money, typically investing larger amounts in businesses with proven traction and scalability.
Do I need to give up control of my business with equity financing?
You don’t usually need to give up control of your business with equity financing. But it depends on how much equity you sell and who you sell it to. For example, selling 10-20% to the right investor might bring valuable expertise without affecting day-to-day control, while selling 51% or more could give investors majority control.
Photo by Towfiqu barbhuiya on Unsplash
