Debt or Equity: What Most Business Owners Don't Know About Funding Growth

Most business owners can't clearly explain the difference between debt and equity, and it's holding their growth back.

In the British Business Bank's 2024 intermediary survey, 69% of smaller businesses were said to lack awareness of their finance options, up from 60% the year before. Awareness of equity finance is worse still. Around 77% aren't well informed about early-stage equity, and 80% aren't well informed about growth-stage equity.

This knowledge gap has some consequence, as the same research found 72% of smaller businesses will defer their growth plans if they can't secure finance through their usual routes, while 75% still want to grow in the next 12 months. There is a disconnect between what founders want to achieve and their awareness of how to get there.

We want to fix that, in today's blog, let's unpack the two main ways to acquire funding.

The two ways to fund a business

Put simply, external funding comes in two broad forms. You either borrow money you'll repay, or you sell a share of your business for cash you won't; debt or equity.

Debt: you keep control, you carry the obligation

Debt is borrowed money, be it a loan, an overdraft, asset finance, an invoice facility. You take the funds now and repay them over time, with interest.

It's by far the more common route. Around half of UK smaller businesses use external finance, and most of that is debt. Credit cards and overdrafts were the most-used products in 2025, which tells you something important. Most businesses are borrowing for stability and cash flow, but not for growth. What's appealing about this is control as lenders don't take a stake, don't sit on your board, and once the debt clears the relationship ends.

The downside is repayments start whether the growth lands or not, and interest is a fixed cost in every quarter, good or bad. Borrowing costs also remain elevated, with SME loan rates through 2025 sitting well above pre-2022 levels. That weighs on the appetite for longer-term debt, and it should factor into yours. Debt rewards businesses with steady cash flow and a clear line of sight on returns. If you can borrow to fund something that reliably earns more than it costs, it's often the smart, low-dilution choice.

Equity: you share the risk, you share the reward

Equity funding means selling a stake. An investor puts in capital and, in return, owns a slice of what you're building.

There's no monthly repayment and no interest draining cash flow. If growth takes longer than planned, you're not servicing a debt while you wait. For businesses investing ahead of predicted revenue, that breathing room is the whole point. It also tends to fund the boldest growth. Equity is vital for scale-ups, and is mainly associated with tech companies. Asides this, the right investor brings more than money too, be it experience, networks, or a sharper eye on strategy.

The price you pay is giving up a share of the business and, with it, a share of every future profit and often a voice in the big calls. Raising equity is a slower and more demanding process than borrowing, and it's a smaller, more selective market. A bank doesn't care what you need money for when asking for a loan, but an investor will need to be pitched to, and impressed by your business. UK equity investment fell back to 2019 levels in 2025, so investors are scrutinising numbers, plans and teams harder than ever. Equity suits businesses chasing fast, ambitious growth where the upside is large but the path is uncertain. You're trade a slice of the pie for a shot at a much bigger one; but you need to come prepared.

So which is right for you?

There's no universal answer, right choice comes down to a few honest questions.

1. How predictable is your cash flow? Steady income can comfortably service debt. Lumpy or pre-revenue growth may not.

2. How much does control matter? If full ownership is non-negotiable, debt protects it. If you'd trade some control for the right partner and faster growth, equity opens doors.

3. What's the money actually for? Funding a proven, profitable expansion is a different risk to funding an unproven bet. The first often points to debt. The second, often to equity.

4. And what does the return look like? If the investment reliably beats borrowing costs, debt keeps more of the upside with you. If the potential is huge but far from certain, sharing the risk can make sense.

Plenty of businesses use both, in the right proportion, at the right time. The skill isn't picking a side. It's deciding on a funding structure that fits where you are and where you're going.

That's where we come in. We help ambitious business owners replace gut feel with a clear, numbers-led view of what funding really means for their business, before the paperwork's signed.

We don't guess. We guide.

Thinking about funding your next stage of growth? Let's talk it through, properly, before you commit.

Sources: British Business Bank, Small Business Finance Markets Report 2025/26 and SME Intermediary Survey 2024.

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