As the data shows, external finance use is declining – but that doesn’t mean the need for growth capital has gone away. In fact, this might be the best time to rethink how your business funds its next stage of growth.
Top tips for matching finance to business needs: Debt vs Equity for established SMEs
Securing the right type of finance is crucial for an established SME looking to grow, invest, or restructure. Choosing between debt and equity finance depends on your business’s needs, growth plans, and risk appetite. Here are our top tips for making the right decision:
- Consider debt finance if you want to retain control
Debt finance includes bank loans, overdrafts, and asset finance. It’s a great option if your business:
- Has a stable cash flow to cover repayments.
- Needs funds for short- to medium-term growth, such as buying equipment or expanding operations.
- Wants to retain full ownership and control over business decisions.
Tip: Be mindful that debt means regular repayments with interest, which can impact cash flow if not planned properly.
- Opt for equity finance if you need growth capital without repayment pressure
Equity finance involves selling shares in your business in exchange for capital. It’s ideal if your SME:
- Has high-growth potential but lacks the cash flow for debt repayments.
- Is open to sharing ownership in exchange for funding.
- Could benefit from strategic input, expertise, and investor networks.
Tip: Remember that taking on equity finance means dilution—giving up a share of your profits and some decision-making power.
- Prioritise strong financial forecasting
Regardless of whether you choose debt or equity, a solid financial forecast is essential. Lenders and investors will expect to see:
- Your ability to generate revenue and repay debt (for lenders).
- Your potential for growth and return on investment (for equity investors).
- A clear understanding of your financial position and future trajectory.
Tip: Ensure your forecasts include profit and loss, cash flow, and balance sheets with realistic growth assumptions. Confidence in your numbers increases your chances of securing funding.
- Match the finance type to your business goals
- Debt finance allows you to maintain control but comes with repayment obligations.
- Equity finance eases cash flow pressure but requires you to share ownership.
Tip: The best choice depends on your long-term vision—think about how much control you want to retain and how much risk you’re willing to take.
Final thought: Preparation is key
No matter which route you take, preparation is key to securing the right finance on the best terms. As the saying goes, fail to prepare, prepare to fail. Strong financial forecasting and a clear funding strategy will give you the confidence to approach lenders and investors with a compelling case.
To help businesses navigate these challenges, we recently hosted a free event, Understanding Growth Finance, in partnership with Dorset LEP, where expert guest speakers shared insights into funding options for SMEs. Events like these are invaluable for SME owners, directors, and financial leads across all industries, offering knowledge and networking opportunities.
In addition to hosting events, we offer services that can help your business secure the right finance, including:
- Business valuations to provide insight into the true worth of your company.
- Financial forecasting and modelling to help you project future performance and understand cash flow.
- Strategic planning days to help create a clear business strategy that aligns with your growth ambitions – investors need reassurance that the business has a strong, actionable plan to be successful. This also boosts your business’ appeal to potential investors.
- Exit planning to help you plan for the sale or transition of your business. Investors will want to see that there is a clear exit strategy in place to understand how they will achieve a return on investment.
If securing the right finance is a priority for your business, keep an eye on our LinkedIn and events page for details of future events, or get in touch to learn how we can support your growth journey.
