Why debt funding deserves a second look in uncertain times
Rising geopolitical and economic uncertainty is prompting businesses to take a closer look at how they fund growth. While equity investment is often seen as the natural route to expansion, Ebury, the global financial services firm, argues that debt is often more efficient than many businesses realise – offering a lower cost of capital, greater flexibility and the ability for owners to retain control of their business.
Why businesses are opting for debt instead of equity
When businesses seek additional funding, they typically choose between debt financing and equity investment. While debt carries a defined and time-limited cost, equity involves permanently sharing future profits and value creation with external investors.
An example is a Spanish medical device importer sourcing products from China. The business requires £100,000 to purchase inventory, pay overseas manufacturers, cover regulatory testing and certification costs, and fund shipping and customs duties before products can be sold.
One option is for a lender to provide £100,000 and be repaid £110,000 a few months later. Once the loan is repaid, the relationship ends.
Alternatively, an investor may provide the same £100,000 in exchange for a 30% ownership stake in the business. In return, they receive 30% of future profits and retain that stake if the business grows significantly.
The example illustrates a key difference between debt and equity. Borrowing money has a clear, time-limited cost and defined contractual price, whereas selling part of the business creates a permanent cost, and means an ongoing sharing of future value creation.
This difference is reflected in the cost of capital. For most SMEs, the cost of senior debt may sit between 6% and 9%, depending on credit quality, structure and jurisdiction. The cost of equity is often significantly higher, reflecting the additional risk, illiquidity and uncertainty borne by investors.
As a result, introducing prudent levels of debt can reduce a company’s weighted average cost of capital, improve investment economics and increase enterprise value. Debt can also help businesses preserve control. Unlike equity investors, lenders generally do not seek influence over strategy, governance or future funding decisions, allowing management teams to retain greater autonomy as they grow.
Beyond the cost of capital, Ebury argues that growth is increasingly determined by how efficiently capital is deployed.
Businesses that can increase ‘the speed of capital’ and reduce the time between cash outflows and inflows can often scale more efficiently without proportionately increasing funding requirements. Facilities such as revolving credit, invoice finance and asset-based lending can provide flexible access to liquidity while supporting working capital needs.
Charles Hardaker, global head of lending at Ebury, said: “Equity has an important place, especially when a business is very young or taking big risks. Yet, for more established businesses, debt is usually cheaper, faster, and more flexible.
“It allows owners to keep control, plan costs clearly, and grow at a sensible pace. When combined with strong treasury, payments, and FX solutions, it helps money flow smoothly through the business.
“Growth is not just about raising capital. It is about how well that money is used, how quickly it moves, and how much value it creates over time, and we would urge businesses reviewing their funding options to carefully consider the merits of both debt and equity.”