Debt financing means raising money by borrowing, you receive funds now and repay them, usually with interest, over time. Unlike equity financing (selling shares), debt does not dilute your ownership, but it must be repaid whatever happens to the business. Here is a plain-English guide for SMEs in England and Wales.
Debt vs equity, in a sentence
- Debt, you borrow and repay (with interest); the lender has no ownership but ranks ahead of shareholders if things go wrong.
- Equity, you sell shares; investors share ownership and risk, with no repayment obligation.
Most businesses use a mix, and the right balance depends on cash flow, risk and growth plans.
Common types of debt financing
Bank term loans
A lump sum borrowed and repaid over a fixed period in instalments, ideal for one-off investment (equipment, premises, expansion). May be secured (backed by an asset, lower rate) or unsecured (often with a personal guarantee).
Overdrafts and revolving credit facilities (RCFs)
Flexible, short-term borrowing for cash-flow gaps. An RCF lets you draw down, repay and redraw up to a limit, paying interest on what you use, useful for fluctuating working-capital needs.
Asset finance
Borrowing to acquire equipment or vehicles, secured on the asset (e.g. hire purchase or finance leasing). The asset itself is the security, which can make approval easier.
Invoice finance
Releasing cash tied up in unpaid invoices, through factoring (the provider also collects the debts) or invoice discounting (you keep collection). Good for businesses with a strong sales ledger but slow-paying customers.
Bonds and loan notes
Larger or more established businesses can issue bonds or loan notes, effectively IOUs to investors, repayable with interest. Mini-bonds and retail bonds are variants; they can be high-risk. Mini-bonds are often unregulated investments, though their promotion and related activities may be regulated or restricted under FSMA and FCA rules.
Convertible loan notes
A hybrid: a loan that can convert into equity later (often at the next funding round, with a discount or valuation cap). Popular with start-ups because it defers the question of valuation while providing funds now.
Peer-to-peer (P2P) lending
Online platforms match businesses with many individual or institutional lenders, often faster than traditional banks. P2P lending platforms are regulated by the FCA.
The regulatory framework
Lending and debt activities are not uniformly regulated. Consumer credit and regulated lending activities are tightly controlled under FSMA and FCA rules; business-to-business lending is often not a regulated activity. Issuing debt securities is not automatically regulated, but financial promotions, public-offer rules, admission to trading, and related activities may be subject to FSMA and other requirements. Businesses raising debt from the public should consider whether financial promotion restrictions, public offer rules, or prospectus requirements apply, as well as whether FCA authorisation is needed, and take specialist legal advice.
Pros and cons of debt
Pros: no dilution of ownership; interest is often tax-deductible; predictable repayments; you keep control. Cons: must be repaid regardless of performance; interest cost; often needs security or personal guarantees (risking personal assets); covenants restrict flexibility.
Key takeaways
- Debt financing is borrowing money to be repaid with interest, it keeps ownership but creates a repayment obligation.
- Common types: bank term loans, overdrafts/RCFs, asset finance, invoice finance, bonds/loan notes, convertible loan notes, and P2P lending.
- Convertible loan notes are a popular hybrid for start-ups (debt that can turn into equity).
- Lending and debt activities are not uniformly regulated: consumer credit is tightly controlled; B2B lending is often not; debt-securities issuance may trigger financial promotion, public offer, or FCA rules: take advice.
Sources
- Financial Services and Markets Act 2000 (regulation of lending, financial promotions and debt securities); FCA rules on P2P and consumer credit
- General commercial-finance practice in England & Wales (term loans, RCFs, asset and invoice finance, loan notes)
- Law on security and guarantees
--- This article is general information about the law of England & Wales as at 2026, not legal or financial advice. For advice on your circumstances, consult a qualified solicitor or financial adviser.