Structure
Debt against equity
Debt is cheaper, deductible and temporary; equity is permanent, forgiving and expensive. The choice turns on how certain the plan is and how much fixed cost the business can carry, not on which is cheaper on paper.
Also called debt vs equity · debt or equity · cost of equity · should we borrow or raise equity
Interest is deductible and a return on equity is not. On a £5m facility the deduction is worth about £84,000 a year.
| Measure | Amount |
|---|---|
| Gross interest | £337.5k |
| Corporation tax relief | £84.4k |
| Net cost | £253.1k |
Derived arithmetic: £5m at an all-in of 6.75% is £337,500 of interest; relief at the 25% main rate of corporation tax (GOV.UK) is £84,375, leaving a net cost of £253,125. Relief is unrestricted below the £2m net de minimis under the Corporate Interest Restriction (HMRC CFM95140), so a facility this size is well inside it. Not tax advice.
The scope of this page
Worth saying at the outset: we advise on debt only. We do not raise equity and we do not earn anything if you choose it.
That is stated plainly because a page comparing two options is more useful when the reader knows which of them the author sells. Our interest, if it shows anywhere, would be in overstating the case for borrowing, so the more valuable half of this page is the section on when debt is the wrong answer.
Where equity is the right answer, the useful thing we can do is say so and get out of the way.
The genuine difference
Debt is cheaper, dated and unforgiving. Equity is expensive, permanent and forgiving. Everything else follows from those six words.
A lender takes a defined return on a defined schedule and has no claim on the upside. If the business triples in value, the lender is repaid exactly what was agreed. A shareholder takes no defined return, cannot demand repayment, and owns a share of whatever the business becomes.
So the comparison is not really about the cost of capital. It is about which risk you would rather carry: the risk of a fixed obligation in a year that disappoints, or the certainty of having given away a share of every good year that follows.
The tax wedge
Interest is deductible for corporation tax and a return on equity is not, which makes debt cheaper than the headline rates suggest.
On a £5m facility at an all-in of 6.75%, the interest bill is £337,500 a year. Relief at the 25% main rate of corporation tax is worth £84,375, so the net cost is £253,125. A dividend or equity return of the same size attracts no equivalent deduction.
The natural objection is that interest relief is restricted, and it is, but not at these sizes. The Corporate Interest Restriction has a £2m net de minimis, below which no restriction arises at all. A facility of this scale is well inside it.
Rates matter too and they are not static. Bank Rate stood at 3.75%, held since December 2025, which is the reference the floating cost is built on. None of this is tax advice, and a group with substantial existing financing costs should check its own position rather than assume the de minimis covers it.
The two instruments are not competing on price. They are competing on what they demand from you when the plan slips.
| Source | What it demands |
|---|---|
| Equity: no coupon, no maturity | But a permanent share |
| Bank senior: security and covenants | 35–60 on the scale |
| Fund debt: the same, priced higher | 55–80 on the scale |
| Repayment on a fixed schedule | Whatever the year looks like |
What each source of capital asks of a business, ranked by how much. A trade-off rather than a ranking, following the source guide, so no option is highlighted in either direction.
What equity costs
More than debt, and in a currency that is harder to see because it is never invoiced.
Equity has no coupon, which makes it feel free in the years when cash is tight. Its cost arrives at the exit, as the share of the proceeds that belongs to somebody else. On a business that grows substantially, that share is very often a larger number than the whole of the interest that debt would have cost across the same period.
It also carries governance. A new shareholder usually brings consent rights, reporting obligations and a view about the timetable for an exit, and those constrain a management team in ways a covenant package does not, because a covenant is a line you stay inside while a shareholder is a person you consult.
None of that makes equity worse. It makes it a different instrument with a cost that is deferred and uncapped rather than current and defined.
When debt is the right answer
When the cash flow is predictable enough to carry a fixed obligation, and the use of the money has a return.
The clean cases are an asset with a life you can fund over, an acquisition of a business that services its own debt, a working capital need that resolves within a cycle, and a refinancing that replaces dearer money with cheaper.
What those have in common is that the money does something identifiable and the earnings that repay it already largely exist. Debt is a claim on cash the business is confident of generating, so it suits a plan whose main uncertainty is timing rather than outcome.
When borrowing is the wrong answer
When the plan is uncertain, when the earnings are cyclical, and when the money is funding losses. These are the cases worth taking seriously.
A business whose plan might work brilliantly or might not is describing an equity risk, and financing it with a fixed obligation converts a range of outcomes into a solvency question. Early-stage growth, an unproven product and a turnaround all sit here.
Cyclical earnings are the second case. A fixed charge against revenue that swings with a cycle is safe in the good half and dangerous in the other, and the covenant tests arrive quarterly regardless.
And funding losses is the third. Debt taken to bridge a trading problem adds a cost to a business that was already struggling to cover its costs, and it consumes the capacity that would have funded the recovery.
There is a fourth, quieter case: when the amount available is not enough to do the job. A half-funded plan financed with debt carries the whole obligation and delivers none of the benefit, and taking less than the plan needs is often worse than taking nothing.
The lending market is wider than the high street. Most gross SME lending now comes from outside the largest banks.
| Category | Share |
|---|---|
| Challenger and specialist banks | 60% |
| Including non-bank lenders | 68% |
British Business Bank, Small Business Finance Markets 2026 (published 17 March 2026): SME bank lending was £68bn in 2025; challenger and specialist banks accounted for 60% of gross SME lending excluding overdrafts, and 68% including non-bank lenders. Reported as market structure, not as a recommendation of any lender or category.
Where private credit sits
At the dearest end of the debt options, which is a description rather than a criticism.
A fund facility reaches further than a bank will, and it costs more for exactly that reason: it is lending against the part of the earnings a bank declines. For a business that needs the extra reach and can service it, that is a real and useful option.
It should not be the first place a borrower looks. Where bank capacity covers the requirement, the additional cost of a fund facility buys nothing, and the sensible sequence is to establish what the cheapest available structure supports before deciding whether to pay for more.
It is also not a last resort in the pejorative sense. It is the last resort in the ordering sense: the option you reach for when the ones above it do not reach far enough.
Who is lending
A much wider field than most borrowers check, and the data on this is unambiguous.
SME bank lending was £68bn in 2025. Challenger and specialist banks accounted for 60% of gross SME lending excluding overdrafts, and 68% including non-bank lenders.
So a market check confined to the largest banks is a check on a minority of the available supply. A borrower who approaches their own bank and one other, is declined or offered thin terms, and concludes the market is closed has tested a small fraction of it.
That is the argument for running a process rather than a conversation, and it applies whichever way the debt-or-equity question resolves. A business that has properly tested the debt market is in a much better position to judge whether equity is the right answer, because it knows what the alternative amounts to.
The question to ask instead
Not which is cheaper, but how certain is the plan and how much fixed cost can the business carry in a year that disappoints.
If the answer is that the plan is solid and a bad year is survivable, debt is usually right and the tax treatment makes it more so. If the answer is that the plan might not work, equity is doing a job debt cannot do at any price.
Most real situations sit between those, and the useful response is a structure rather than a choice: enough debt that the business is not giving away more than it needs to, and enough equity that a difficult year is a disappointment rather than an event. Sizing that split is the actual work, and it depends on numbers specific to the business rather than on any general rule about which instrument is better.
Common questions
Is debt cheaper than equity?
Yes on a current-cost basis, and more so after tax. Interest is deductible for corporation tax where equity returns are not, so £5m at 6.75% costs £337,500 gross and about £253,000 net of relief at the 25% main rate. Equity's cost is deferred and uncapped rather than absent.
Will my interest relief be restricted?
Not at these sizes. The Corporate Interest Restriction has a £2m net de minimis below which no restriction arises, and a lower-mid-market facility sits well inside it. A group with substantial existing financing costs should check its own position. Not tax advice.
When is borrowing the wrong answer?
When the plan is uncertain, when earnings are cyclical enough that a fixed charge is dangerous in the bad half, when the money is funding losses rather than a return, and when the amount available is not enough to do the job. A half-funded plan carries the whole obligation and delivers none of the benefit.
What does equity cost?
The share of the exit proceeds that belongs to somebody else, which on a business that grows substantially is very often larger than all the interest debt would have cost over the same period. It also carries consent rights, reporting and a view on exit timing. The cost is deferred and uncapped rather than current and defined.
Where does private credit fit?
At the dearest end of the debt options, because it lends against the part of the earnings a bank declines. That reach is useful where it is needed. Where bank capacity covers the requirement, the extra cost buys nothing, so establish what the cheapest structure supports first.
My bank said no. Is the market closed?
Almost certainly not. Challenger and specialist banks accounted for 60% of gross SME lending excluding overdrafts in 2025, and 68% including non-bank lenders. A check confined to the largest banks tests a minority of available supply.
How do I decide between them?
Ask how certain the plan is and how much fixed cost the business carries in a year that disappoints, rather than which is cheaper. Solid plan and a survivable bad year favours debt. A plan that might not work is an equity risk that debt cannot price at any rate.
Do you advise on equity?
No. We advise on debt only and earn nothing if you raise equity, which is worth knowing when reading a comparison written by us. Where equity is the right answer the useful thing we can do is say so.
The full treatment sits in the guide: debt vs equity.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.