Funding growth and capex without giving up the equity
With SME equity investment down 20% and private-credit deployment near a record, the relative case for funding growth with debt rather than equity has strengthened for the right lower-mid-market borrower.
- Dated
- 20 May 2026
- Desk note
- Dated to the data
- Reading
- 7 min
Managing Director
SME equity investment in the UK fell 20% in Q1–Q3 2025 to £7bn, back toward 2019 levels. In 2024, the private-credit market deployed nearly US$593bn — almost triple the 2020 figure. The relative supply of debt against equity has shifted materially, and for a cash-generative lower-mid-market company with a clear growth plan, the case for funding it with debt rather than dilutive equity has rarely been as well-supported by the data.
Where did the equity market go?
Venture and growth equity ran hard through 2021 on the same tailwind as everything else: zero rates, abundant risk capital, compressed return hurdles. The repricing of 2022–23 hit equity harder than debt. A private-credit fund can raise rates alongside the cycle; an equity investor underwriting a ten-times revenue multiple cannot simply add a coupon. The British Business Bank’s annual read of the UK equity market shows £7bn of SME equity investment in the first three quarters of 2025, down 20% on the same period of 2024 (approximately £8.75bn on the BBB’s revised comparator), back toward 2019 levels.
SME equity investment fell 20% in Q1–Q3 2025, back toward 2019 levels.
| Period | Equity investment (£bn) |
|---|---|
| Q1–Q3 2023 | £6.5bn |
| Q1–Q3 2024 | £8.8bn |
| Q1–Q3 2025 | £7bn |
- SME equity investment, Q1–Q3 (£bn)
SME equity investment, Q1–Q3 of each calendar year (the Beauhurst dataset lags, so the annual BBB report carries only the first three quarters of the most recent year). All three columns are on the same Q1–Q3 basis; they are not comparable to the full-year 2019–2021 figures reported in earlier editions. Q1–Q3 2025 (£7bn) and the -20% YoY decline are stated verbatim in the SBFM 2025/26 report, and it is the hard datum highlighted in claret; Q1–Q3 2024 (≈£8.75bn) is the implied prior-period comparator derived from those two figures, so it is shown hatched — the BBB revised the 2024 figure upward between its 2024/25 and 2025/26 editions. Q1–Q3 2023 (£6.5bn) is hard from the SBFM 2024/25 edition.
The decline is structural as well as cyclical. Changes in the equity universe (LP concentration, a slower exit market, longer hold periods) have compressed the number of firms actively writing £2–10m equity tickets into UK lower-mid-market companies. For a founder or owner-manager who arrived at a funding conversation expecting a competitive equity process, the market is thinner than it was three years ago.
What private credit can now do
The contrast on the debt side is sharp. ACC / AIMA’s annual survey of private-credit managers puts 2024 deployment at US$592.8bn, up 78% on 2023 and roughly three times the 2020 figure. That capital needs to be put to work, and the competition for creditworthy deals flows downstream into better terms for prepared borrowers at the lower end of the market.
Private-credit deployment tripled in four years: from US$196bn to US$593bn.
| Year | Deployed (US$bn) |
|---|---|
| '20 | $196.0bn |
| '21 | $200.0bn |
| '22 | $203.0bn |
| '23 | $333.4bn |
| '24 | $592.8bn |
- Private credit deployed per year (US$bn)
Fresh capital deployed by ACC / AIMA FTE surveyed private-credit managers per calendar year. 2020 and 2022–2024 are hard (stated in successive FTE editions); 2021 is illustrative: FTE 2023 described 2021 as approximately US$200bn without a precise figure. The 2022 figure uses the FTE 2024 restatement (US$203bn), which supersedes the US$333bn stated for 2022 in FTE 2023 (a sample/definition change between editions). Sample composition varies year to year so the levels are directional; the broad upward trajectory is robust across all editions.
Source · ACC / AIMA, Financing the Economy 2025 (FTE 2025), with prior editions for 2020–2023
−20%
Fall in UK SME equity investment in Q1–Q3 2025 versus Q1–Q3 2024, to £7bn, back toward 2019 levels.
Source · British Business Bank, Small Business Finance Markets 2025/26
The instrument should match the cash flow, not the fashion
The shift in relative supply does not mean debt is always the right answer. The test is simple: how certain are the operating cash flows that service it? A company growing into a new contract, building a second site, or adding capacity to fill demonstrable demand is typically generating predictable incremental cash flows. Debt, whether term loan, revolving facility or asset finance, can be sized to those cash flows, priced against the cycle, and drawn without diluting the ownership structure. Interest is deductible; equity is permanent.
The cases where equity is the right instrument are narrower: a business burning cash through a pre-revenue build, a discontinuous strategic pivot that cannot be stress-tested against historical earnings, or a situation where the founders need a partner’s network as much as the capital. For the median lower-mid-market growth plan (a company with £1–5m of EBITDA expanding into an adjacent market or investing in plant) none of those conditions hold.
Equity dilutes permanently. Debt repays. For a cash-generative growth plan, the question is not whether to borrow but how to size the facility so the downside does not bite.
What structuring actually requires
The discipline is in the sizing. A facility calibrated to the company’s through-cycle EBITDA, not the peak case and not the plan, carries the downside. A covenant package with realistic headroom, tested against a 20–25% EBITDA stress, holds through a trading setback without triggering a technical default. And the tenor should match the asset life: equipment finance on a short payback horizon should not be a long-dated bullet; a site development with a two-year revenue ramp should not be a twelve-month revolving facility.
Two other structural choices matter at the lower-mid-market level. First, whether the growth plan is continuous or episodic: a company making a series of bolt-on acquisitions over three years is better served by a committed accordion facility it can draw against each event than by returning to the market each time and repricing from scratch. Second, whether the assets being financed have standalone security value. If they do, asset-based lending (lending against the plant, the receivables, or the stock rather than against EBITDA) often provides more headroom at a lower cost than a cash-flow facility, and it is consistently overlooked in favour of the simpler term loan.
Questions a CFO asks
Common questions
- How do I know whether debt or equity is right for our growth plan?
- The test is cash-flow certainty: if the plan generates predictable operating cash flows, debt is almost always cheaper because it does not dilute ownership and the interest cost is tax-deductible. If the plan requires several years of negative cash flow before breakeven (a genuinely venture-type profile), then equity, or a hybrid instrument with a long deferral, is more honest about the risk. Most lower-mid-market growth plans sit in the first camp.
- What kinds of growth or capex does debt actually cover?
- A clean cash-flow term loan or revolving facility can fund most organic growth: working capital builds, new equipment or plant, a new site, a hire programme with a quantifiable payback. Asset finance or sale-and- leaseback can release capital already tied up in plant. Acquisition finance (including bolt-on lines) covers inorganic growth. The instrument should match the asset life and the cash-flow cycle: equipment finance on a twelve-month payback should not be a five-year bullet; a site build with a two-year ramp should not be a twelve-month revolver.
- Won't debt leave the business exposed if trading dips?
- Properly structured, debt does not create binary risk: the covenant package, the maturity, and the sizing all have to be calibrated to a through-cycle scenario, not the base case. A facility sized to 80–85% of the through-cycle case carries the downside; one sized to peak EBITDA does not. The discipline is being honest about the stress case before the terms are agreed, not after.