Debt versus equity: which money should you actually take?
The plain economics of giving away a share versus paying interest, the kinds of debt available to a small UK company, when a loan beats a round, when it is dangerous, and how founders combine the two.
Equity is money you never repay but share the upside on for ever. Debt is money you repay with interest but keep all the upside. Founders default to equity because it is what they read about; for many businesses — profitable ones, asset-backed ones, ones with predictable cash — debt is cheaper by a wide margin and keeps the company theirs. The question is not which is better; it is which your business can safely service.
The arithmetic of giving away 20%
You raise £400k at £1.6m pre-money for 20%. Five years later the business sells for £8m. The investor's 20% is £1.6m. The £400k cost you £1.6m — a 400% return to them, which is the price of taking the risk when you had no evidence. Now suppose you could have borrowed the £400k at 10% over four years instead: total interest around £90k. If the business could have serviced the repayments, the debt was seventeen times cheaper. If it could not — if a bad quarter would have meant default — the equity was the only sane option, whatever the arithmetic.
The kinds of debt available
- Term loans from challenger banks and specialist lenders. £25k–£2m, two to five years, 8–14%, usually secured by a debenture and a personal guarantee. For established, profitable businesses.
- Secured lending from private credit. £100k–£2m at 6–10% fixed, secured on property or assets; faster and more flexible than banks for the right borrower. Founder Capital's Found Credit is one; there are others.
- Asset finance. Equipment, vehicles, fit-outs financed against the asset itself. Cheap, fast, limited to the asset.
- Invoice finance. Borrowing against unpaid invoices. Useful for businesses with long payment terms and good customers; expensive if you lean on it permanently.
- Revenue-based finance. An advance repaid as a percentage of monthly revenue. Quick, no dilution, effective cost often 15–30% — fine for a short funding gap with a known return, ruinous as a long-term source.
- Start Up Loans. Government-backed personal loans up to £25k per founder at 6%. Small, but genuinely available to pre-revenue businesses.
When debt beats a round
You have eighteen months of profitable trading. You can see the cash to service repayments even in a bad quarter. The money buys something with a predictable return — a second site like the first, equipment, stock for known orders. You would rather own 100% of a £3m business than 75% of a £4m one. In that picture, a loan is the right answer and a round is an expensive mistake.
When debt is dangerous
You are pre-revenue or barely profitable. The money funds experiments — new products, new markets — whose return is uncertain. A missed quarter would mean missing repayments, and the lender has a charge over the business and your house. In that picture, debt converts a survivable bad year into a fatal one, and equity is the right answer precisely because nobody has to be repaid.
Combining them
Mature seed companies often do both: equity for the uncertain growth spend, asset finance for the fit-out, a small term loan for working capital. Investors generally welcome sensible debt alongside their equity — it stretches their money — provided it is disclosed and the repayments are in the forecast. What they do not welcome is discovering a loan in diligence, or a personal guarantee that means the founder's attention is on the bank rather than the business.
Questions founders ask
"Will a loan hurt my SEIS/EIS raise?"
Not in itself. SEIS/EIS money cannot be used to repay existing debt, so the forecast must show the loan serviced from trading, not from the round.
"Should I give a personal guarantee?"
Most small-company lending requires one. Limit it where you can — capped amount, released at a trading milestone — and understand that it makes the company's debt your debt.
"Can I list on Find if I'm raising debt?"
Find lists equity, loan notes and acquisition vehicles from founders; lending to businesses is handled separately through Found Credit's borrower check. Loan notes from investors to your company can be listed as an instrument.