Debt vs equity finance

With traditional banking’s share of small business lending falling to 41% in 2023, and seed stage companies making up 38% of reported equity deals in the same year, a fall of 12% when compared to 2014, it’s not surprising that small businesses in 2025 are wondering who to turn to for funding. 

But before deciding on challengers vs traditional banks, or one lender vs another, a good place to start in your funding journey is: equity finance vs debt financing. 

What is equity financing? 

Equity finance involves trading percentages of ownership in your business (shares) for funds. Essentially, you sell a piece of your business. 

Investors are often given a voice in the business, but not always, and can become invaluable assets to your team, bringing years of experience and industry knowledge to your growing company. 

Benefits of equity finance 

You may not be expected to repay the funds. With a loan, you usually have to make regular payments in installments with interest added on, but with equity finance, you usually pay the investor in dividends, meaning you only pay when you turn a profit. This can reduce some of the burden of debt and give you more mental space to focus on growing the business. 

Many investors are industry veterans who have turned their hands from managing to investing — this can gain you access to decades of experience and a guiding hand. 

An investor usually needs to believe in your business to decide to invest, or at the very least, see something of value in the product or services you are offering. Knowing this can help build your confidence, particularly as entrepreneurship can be a lonely career path, and having someone in your corner who likes your business enough to put money into it can go a long way in building your own self-belief. 

Drawbacks of equity finance 

Many business owners go into business for themselves precisely because they want to go it alone — to be their own boss. Equity finance means sacrificing part of that ownership, control, and of course, a percentage of profits. 

An investor may have a certain way of doing things, and that may conflict with your way of working. Depending on the agreement you have signed with them, it’s possible this can cause conflict, lead to disagreements, and create barriers to progress, leading to stagnation as each party may struggle to compromise. 

Also, with a loan, once you have repaid the loan, the agreement is usually over. With equity finance, your investor owns their shares until a sale occurs, so you must continue to pay them their agreed percentage of profits even after you’ve fully repaid the amount they extended in finance. 

What is debt financing? 

Debt finance involves taking debt on — meaning taking out a loan or other form of funding which must be repaid, with interest added on, over an agreed period of time. Examples of debt financing include commercial mortgages, bridging loans, asset finance, and invoice finance. 

With debt financing, you don’t sell a portion of your business, but you do need to pay the loan back in line with the agreed schedule. Debt financing isn’t only helpful for gaining access to cash, it can also help you access or spread the cost of equipment, vehicles, and properties. 

Benefits of debt finance 

Debt finance doesn't require you to sell a piece of your company, meaning you retain control and ownership of your business. This means you make the decisions, without external input, and you keep your profits, aside from the agreed repayments. 

If you get a fixed interest loan, the consistent nature of repayments can make budgeting easier for some business owners. If you intend to borrow more in the future, debt finance can have a compounding effect on your company credit score, growing it as your credit history grows — as long as you repay your loans on time and don’t surpass reasonable levels of credit utilisation. 

Debt finance is also generally more flexible and accessible than equity finance. Equity finance generally requires marketing your business to investors as a worthwhile investment. This isn’t necessarily a case of proving that your business will turn a healthy profit — investors also need to consider whether the company is something they want to give their time to. With debt finance, on the other hand, lenders generally just need to know you can repay the loan and that you meet their eligibility requirements. And, there are a wide range of loan types available, all designed for different needs and business structures. 

Drawbacks of debt finance 

While a consistent repayment structure can be beneficial in terms of budgeting, they are also much less flexible, meaning even in a downturn or a low-revenue month, you’ll still need to repay the funds at the agreed rate. This can create stress and become a burden on working capital. 

Some business finance types ask for assets to be put up as collateral. These are called secured business loans. Others ask for a personal guarantee from the company director, which is an agreement that the director will take on the responsibility of the loan, meaning if the business closes down, the director is still responsible for making these regular payments. 

The somewhat more accessible nature of debt finance can also make it tempting to continue drawing on funds, creating a cycle of debt utilisation that eats into profitability and creates a sense of unease. Debt finance is only suitable for those with strong control over their finances. 

Debt vs equity finance: how to choose? 

As always, only you know your unique circumstances and needs, and so only you can truly decide for yourself. However, here are some questions to ask yourself to help you navigate the debt vs equity debate: 

• Do you want to retain complete control over your business? 

• Do you want to retain complete ownership of your business? 

• Do you want to repay the funding along with fees only?

• Are you happy to make regular payments? Do those payments fit well into your monthly budget? Can you make those repayments even if you lose a client or face an economic downturn? 

If you answered yes to most of these questions, debt financing may be right for you. Alternatively: 

• Do you want the support of someone with industry experience as you grow your business? 

• Are you looking for a large amount of funding without putting up a personal guarantee or any private assets as security? 

• Are you happy to sacrifice a portion of your business in exchange for the funding? 

• Are you willing to give up some control over how your business is run? 

• Do you want to be connected with a wider network of industry peers? 

If you answered yes to the above questions, equity financing may be more suitable. 

Is there a form of financing that sits somewhere in the middle? 

Yes, there is. It’s called a merchant cash advance. It’s an option available for businesses that process card payments. 

Essentially, you get an advance on future earnings, which you then repay as a percentage of revenue from card transactions. You continue to pay this percentage until the advance, plus any fees, are paid off, which means you get the benefit of revenue proportional repayments that you would get from equity finance, along with the pros of having an eventual end date (even if that date is not known in advance) and not needing to sell a piece of your company. 

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £800 million in finance to more than 18,000 customers. 

Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just click the link below and submit your details to find out if you could be eligible to borrow up to £20 million. 

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Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.