Five questions to ask when deciding between debt or equity funding

For SMEs looking to expand, securing growth funding is often crucial. From an entrepreneur launching their start-up businesses to an established business looking to scale-up its operations, cash can enable businesses to turn their ideas into reality. So, what finance solution best fits your growth objectives?

Sajid Sabir, Investment Associate based across Maven’s Midland’s offices, highlights the questions business owners should ask themselves to determine what funding is right for their business.

1. What stage is my business at?

The first step to identifying a funding solution to fit your business requirements is understanding the stage of the growth cycle that your business is at as this will impact the type of funding you can access. Traditionally, debt finance is more appropriate for businesses that can provide a sales history or track record to help a prospective lender understand whether the business can afford to repay the debt it wishes to take on. Such companies tend to be at the ‘growth stage’ of the business cycle, generally they are profitable and with a positive cash flow.

Equity is generally more suited to start-up and early stage companies as well as businesses that require a large funding package to support significant growth or development. Mainstream lenders are usually reluctant to lend cash to start-up businesses however, equity investors are willing to take on more risk by investing in a start-up, for the associated higher rewards.  Whatever the situation, the ultimate goal of equity funding is to create long-term value by helping a business achieve its full potential.

2. Why does my business need the funding?

Before you begin your journey for funding, you need to know how much funding you need and what you need it for. Debt funding is usually a good fit for businesses that are looking to support short-term (1 to 5 years) growth. Short-term funding needs can include the purchase of assets (e.g. machinery, IT equipment), help to execute sales and marketing activities, hire more staff and support working capital needs.

Equity funding is a medium to long-term investment solution and can be used for a range of requirements, supporting a wide variety of businesses in achieving their strategic objectives.  Equity investments often aims to fund the business through to revenue, and because an investor has no rights to have their capital repaid by a certain date, both parties are focused on enabling the company to become profitable.

3. How much finance does the business need?

Understanding the right amount of capital required for your business and matching it with the right type of funding is vital. If you ask for too much, you may risk being unable to secure the loan or if successful, you may risk paying unnecessary interest. Ask for too little, and you risk running out of money too quickly to achieve your goals. This is why a business plan is essential. It should include your non-financial and financial goals to help you and the funder understand that you are applying for the right amount of funding.

As a small business, the amount you can borrow through debt financing can be limited. Most lenders have a cap on the maximum they can lend and this will be based on your circumstances and financial records. On the other hand, equity is more flexible in order to remain fluid to the needs and changes within a business. You’ll need a strong management team in place and the ability to sell your concept to investors for their buy-in as equity is a shared journey where expectations and objectives must align with both the investor and the business.

4. When does my business need funding?

If your business requires funding as soon as possible, then debt funding may be the best option. In most cases, you will need to provide a short business plan to help a prospective funder understand the business and why you need the money.

Although debt financing tends to be a reasonably fast process, generally lenders can take between a couple of days to several months to process an application so it’s imperative that in any situation a business begins this process as soon as possible with the right documentation and records in order to make their experience smooth.

Equity fund raising can take up to 9 months and requires a business to commit time and resources to the process. It often involves appointing advisors, finding appropriate investors, and is likely to include financial, commercial, management and legal due diligence which can me lengthy, but worth it to source the right funding partner to support your business.

5. Am I looking for more than just funding?

It is rare for mainstream lenders to provide business support, therefore equity funding might be more attractive to businesses looking for strategic and operational support.

However, at Maven, we work collaboratively with your company to provide dedicated support and guidance, tailoring our approach to tackle specific barriers small businesses face in their local area. Our network of investment specialists works closely with chambers of commerce, advisers and business support organisations to provide local support for local businesses.  Maven is able to connect the companies we work with to our national network and sectorial expertise, regardless of the type of finance they have acquired.

Are you looking for funding for your business? 

Our funding has helped businesses across the Midlands to overcome barriers which have held them back from fulfilling their growth potential.  If you would like to find out more about the companies we’ve supported in the past and how the Maven MEIF Debt Fund could work for you, please contact us on the below:

0121 231 7125 - Birmingham office (West Midlands) or  0115 697 6160– Nottingham office (East and South East Midlands).

The Midlands Engine Investment Fund project is supported financially by the European Union using funding from the European Regional Development Fund (ERDF) as part of the European Structural and Investment Funds Growth Programme 2014-2020 and the European Investment Bank.

Not based in the Midlands? Maven has significant experience of managing regional growth funds across the UK, including on behalf of the Northern Powerhouse and Finance Durham, and since 2009 has invested over £340 million in more than 180 UK SMEs to support their growth strategies.

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