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Weighing up debt versus equity funding


Set of weighing scales in a shop

When your business is growing and you’re ready to take it to the next stage, you may need to raise funds to realise your ambitions.

Two of the most common sources of external finance are debt funding and equity financing. Read on to find out more about each option and see which could be best for you and your business.

Equity funding involves raising funds by selling shares in a business. In return for their cash, investors will own part of the business and can earn returns through dividends – a slice of the profits distributed among the shareholders – or by selling their shares.

Equity funding can be appropriate for those who are able to put a value on the company and willing to give up a share in the business in return for investment. However, they need to remember that any shareholders they bring in are now owners of the business and may want to have a say on its direction. This can cause friction.

Debt funding, on the other hand, enables you to raise money without giving up a share in your business. Instead, the loan – plus interest – is repaid over a set period time, for example four years.

Banks have long been seen as the only port of call for business loans. However, since the financial crisis more than a decade ago, banks have been reducing their lending to small and medium-sized businesses.

In his Mansion House speech of June 2019, Bank of England Governor Mark Carney said: “SMEs are the engine room of our economy, generating around 60% of all private sector employment and accounting for over half of all private sector turnover. And yet SMEs face a £22 billion funding gap.

“Almost half of all SMEs don’t plan to use external finance, citing the hassle or time associated with applying. Of those that have approached their bank, two fifths have been rejected.”

Think Outside The Bank

At LendingCrowd, affordability is at the heart of every lending decision. We assess each application on a case-by-case basis and we focus on the ability of a business to repay its loan. Our platform is built on leading-edge proprietary technology and we aim to make a lending decision in as little as 24 hours.

Our business loans are funded by our growing community of lenders, with terms ranging from six months to five years and rates starting at 5.95%.

We strive to understand each business that we lend to. Knowing how the funds will be used gives the experts in our Credit Team flexibility when making decisions. Understanding each borrower’s individual needs helps us to build strong relationships for the longer term.

The Covey Agency, a full-service advertising, creative and marketing agency based in Edinburgh, used a LendingCrowd loan to grow the digital side of its business. Managing Director Vic Covey said: “We’ve done two deals with LendingCrowd and it’s been seamless – everybody’s been delightful and very helpful. LendingCrowd ticks all the boxes for me.”

For more information about applying for a loan with LendingCrowd, see our series of Borrowing toolkit posts or visit our borrower page.

Fund your ambitions

As a borrower, it’s important to remember that defaulting might lead to the debt being passed to an agency for collection. LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.

Article author

Gareth Mackie

Gareth Mackie

If you invest through LendingCrowd you should understand that your capital is at risk.

LendingCrowd is the trading name of Edinburgh Alternative Finance Limited, Company Number SC468392, authorised and regulated by the Financial Conduct Authority (Firm reference number 670991). LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.

Read more about the risk involved when investing and borrowing.

The company's registered office is 23 Manor Place, Edinburgh, EH3 7DX.

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