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Small Business Financing:

Debt or Equity?

Getting access to the right type of funding, that’s right for your business, at the right time – can be the deciding factor between success and struggle. 

UK SMEs typically have two routes of capital-raising for growth, acquisitions and other strategic milestones: Equity or Debt financing. 

So, how do you know which is best for you? We look at the funding options of both.

Debt Financing

When you borrow money from lenders to support your business, it is known as debt financing. Here you don't need to give company shares to your lender, instead you pay back the principal amount with interest within a specific repayment period. The interest rates can be fixed or variable depending on the loan product.

Due to the lower level of risk to the lender, secured debt is generally easier to obtain, and cheaper to service. But unsecured loans are also widely available. 

What’s the upside of taking on debt financing?

  • Clear and finite terms: It gives you a clear understanding of how much you owe, and once you have repaid the entire amount, you are under no other obligation.
  • No dilution of ownership: In debt financing, you don't have to lose shares in the company against the capital they offer you.
  • No one interference in business operations: No investor or lender is getting shares in the company, and if you don't have any shareholders initially, no one will interfere with your business operations.
  • Less time-consuming: While there is always a compliance process, you can quickly get funds after producing the necessary business documents for the lender. 

The downsides are usually that the money is more expensive and no matter what happens, you are locked in to a repayment agreement. 

  • Timely payments: You must pay the lender, with interest added, the agreed repayments, even if your business is not making money. This can be challenging, especially for cash-strapped SMEs.
  • The process can be difficult: Applying for a loan can be easy, but qualifying can become complicated if you cannot produce the required business documents or have the trading books in place.
  • Potential financial losses: When you cannot pay a loan, the lender may consider the company assets collateral. Or, you may need to pay the loan from your personal funds leading to potential losses

So, if you are looking for debt financing and would like to discuss how we can help fund your growth plans, please feel free to get in touch with us at SME Capital.


Equity financing

With equity financing, businesses sell a part of their business to an external investor or venture capitalist in exchange for capital through the issue of shares. 

Taking an equity stake in a business, an investor is asking for a stake in your future business profits rather than asking you to repay the funds with interest at regular intervals. 

What are the advantages?

  • No monthly repayments: You can focus on core business activities rather than worrying about how to pay back funds borrowed. 
  • More cash flow: You don't have to repay any loan; therefore, the business always has more capital. You can also invest more profits from revenue to grow the business without a repayment.
  • Greater expertise, skills, and networking: Investors know their money will go down the drain if the business fails; therefore, many will provide the time to share their expertise, skills and network to help to improve your business (and their investment).
  • Possibility of additional sources of funding: An investor may provide additional funding when your company grows.

The disadvantages of Equity Financing usually revolve around control and a new way of working.

  • Loss of control over your business: Since investors get company shares after investing in them, company owners may worry about losing control over business operations. There are also Stakeholder expectations to now manage with board meetings, and regular performance updates.
  • Need to split profits: Companies must split their profits with investors in exchange for the financial value and expertise they bring in. Dividend payments expected at some point in the future.
  • Time-consuming process: Raising funds with this approach is time-consuming as owners must pass several rounds of negotiations and pitching.

So which financing option is suitable for you?

Selecting the right financing option for your business depends on your circumstances, and preference. There is no one-size-fits-all approach for SMEs.  

Business owners tend to choose equity finance when they perhaps lack previous business experience and don’t have the trading books to apply for a loan. Others don’t want to commit to paying fixed loan payments every month and want to keep cash flow to cope with the growth plans.

Debt financing is a route for more established businesses with reliable cash flow and an established business model, who want flexibility with both short-term and long-term funding options.

Many SMEs choose debt financing to maintain control over their business and don't want to share ownership of their company or profits. For them, the risk of losing decision-making control outweighs taking on debt investment. 

Every business is different, and so is its funding requirement. So you should always caref
ully consider your options. 

SME Capital Debt Financing

At SME Capital we do not ask for personal guarantees or collateral.

We provide specialised, long-term financial alternatives rather than a general loan that applies to all businesses in the UK.

We are here because we firmly believe that our specifically designed finance solutions for UK companies, which will aid in your growth and success, represent a better option. We are experts in SME lending, therefore every customised loan we make for you will be designed especially with the goal of becoming your long-term finance partner.

Whether you need financing for a refinance, succession planning, M&A, or growth and expansion, we give you the opportunity to thrive without asking you to give up control, equity, or personal assets.

If we don't think it is the right direction for your business, we'll tell you. 

SME Capital uses a cash flow-based approach to lending, offering a multiple of business profitability, specifically EBITDA, as opposed to a loan amount being directly tied to the value of specific assets. We can provide an economic solution to consolidate smaller lenders, or refinance expensive short-term loans, while providing additional working capital for the business.

With repayment terms from 3 to 7 years and flexibility on repayment structures SME Capital is an effective, relationship-led, refinance solution for qualifying businesses in any sector that have been trading more than 3 years with £250,000+ EBITDA.

About SME Capital

SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market and have dedicated Regional Directors based across the UK. By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions.

March 2023

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