Debt financing vs equity financing - a Growth Street guide

Looking to fund your business growth through debt or equity financing? We weigh up the cost of both routes to help you decide which one is best for your growing business.

When you’re looking to grow and your capital requirements are increasing, you might be thinking about following one of two routes: equity financing or debt financing.

While offloading an equity stake is a common way to raise a sizeable sum of capital, selling equity isn’t always the right path for some SMEs. For many business owners, retaining the right to run their business the way they choose, without external interference, is just too important.

Business owners should also consider the relative cost of equity and debt when it comes to profitability. Sometimes, the profit available after selling an equity stake might actually be lower than the profit that remains after servicing the interest on the debt. For businesses looking to reinvest profits into operations - whether that’s hiring new staff or buying more inventory - the cost of those profits should be taken into consideration.

When it comes to borrowing with debt, SMEs should be aware of the security which lenders often require. At Growth Street, all loans are secured with debentures and/or personal guarantees, but this isn’t the case for all finance providers. Timing might also be an issue for businesses. For many SMEs, getting a loan from a bank can be a drawn-out process, but alternative finance options pride themselves on being able to complete transactions quickly, using digital tools to speed up processes like identity verification.

When it comes to the cost of debt, different kinds of business finance emphasise predictability or flexibility. A solution like a term loan might come with strict repayments at specific times over the loan’s duration, with hefty charges in the case of late repayments. With some revolving credit facilities, loans have no end-date, rolling over at the end of a term. For example, a GrowthLine allows borrowers to draw down funds and make repayments within their limit as often as they like in a given month.

As with virtually all loans, you need to be sure your business can generate enough cash to service not just debt repayments, but interest too. Growing businesses may experience cash flow shortages that make committing to regular repayments difficult. Late payments can, in turn, affect your credit rating, potentially making it more difficult to apply for funding support further down the line when, say, expansion is on the agenda. 

debt financing vs equity financing

Using debt finance to facilitate growth can come with benefits, however!

Firstly, in some cases, the interest payments on a business loan can be deducted from your business’s income as they can be classified as business expenses.

Similarly, interest expenses could be deducted from earnings before income taxes are calculated, thus acting as a tax shield. This means that debt might lower your business's tax bill.

Secondly, with many loan products, your only obligation is making repayments to your lender within agreed timeframes. You do not have to share your business’s profits, leaving you free to reinvest in your business.

What debt is best?

Different kinds of debt suit different businesses: every company has a slightly different business model, and no solution is the right fit for every firm. It’s advisable to research your options thoroughly in order to get the right deal for you.

Our business finance facility, GrowthLine, is helping ambitious UK SMEs get the credit they need to grow sustainably. By integrating with cloud accounting software such as Xero and QuickBooks, we’re able to monitor the performance of your business in real-time to provide you with the funding you need, when you need it.

Sound good? See whether GrowthLine might be the right solution for your business.

Want to know more? Take a look at some of our previous articles:

Comparing the cost of business credit (in the absence of an APR)

5 tricks used to charge your business more for credit - and how to avoid them


Growth Street Exchange Limited is authorised and regulated by the Financial Conduct Authority (FRN 739318). Growth Street Exchange Limited is registered in England & Wales (company number 09495712) with its registered office at 5 Young Street, London W8 5EH.

Written on in Business Insights
Content Executive