Debt or equity: choosing between them
Both buy you time. One prices it as a fixed cost with a fixed date, the other as a share of everything that follows. The choice turns on how predictable your next twelve months are.
In brief
- Equity is expensive and forgiving. Debt is cheaper and unforgiving.
- The question is not which is cheaper but which failure mode you can survive.
- Most companies at scale end up with both, in that order.
The usual framing is that debt is cheaper than equity. It is, and that is not the useful question. Both instruments buy the same thing — time — and they differ in what happens when the plan you bought the time for does not hold.
What each one costs
Equity has no stated price, which is why it feels free and is not. Selling 20% of a company that eventually exits at £200m costs £40m. A £10m facility over four years costs perhaps £3m all in. On any single transaction the arithmetic is not close.
13×
Ratio of equity cost to debt cost on a £10m raise, assuming a £200m exit
The arithmetic is also incomplete, because it prices only the good outcome. Equity absorbs a bad year silently. Debt does not: it has a payment date, and the payment date does not move because your pipeline slipped.
The real question
Not which is cheaper, but which failure mode you can survive. Ask three things:
- How predictable is revenue over the term? Contracted and recurring supports debt. Project-based and lumpy does not.
- What is the money for? A bounded investment with a modelled payback suits debt. Finding product-market fit does not.
- What happens in the downside? If a 20% revenue miss breaches a covenant and you have no equity backer willing to bridge, you have chosen the wrong instrument.
| Situation | Equity | Debt |
|---|---|---|
| Revenue misses plan by 20% | Absorbed | Likely covenant breach |
| Company outperforms | Very expensive | Cheap, plus warrants |
| Time to close | 3–6 months | 6–10 weeks |
| Governance cost | Board seat | Reporting and covenants |
| Cost if the company fails | Nil | Personal to the process |
Why most companies end up with both
Equity funds the part of the business that is still a question, and debt funds the part that has become an operation. A company that has found its market and is buying growth it can model is a different credit risk from the same company eighteen months earlier, and the capital structure usually catches up shortly after the business does.
Equity is patient and expensive. Debt is cheap and has a calendar.
The sequencing that works
Raise equity when the question is what the business is. Raise debt when the question is how fast it can execute something it already understands. Raise debt shortly after equity, while the balance sheet is strong and the lender is competing for you rather than assessing you.
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