Equity financing means raising money by selling shares in your company to investors. You don't repay it or pay interest, but you give up part of your ownership, future profits and some control. This guide helps UK limited company directors weigh that against borrowing, with a worked example of what each really costs.

Worth knowing: equity has no repayments, but it has a price. Sell 20% of your company for £100,000 and, if it's later sold for £2m, that stake is worth £400,000. A loan costs interest and fees, but you keep every share. (Illustrative example, worked through below.)

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What is equity financing?

Equity financing is raising money by selling new shares in your company. Investors pay cash for part-ownership and get a return only if the company grows, through dividends or by selling their shares later.

Because investors are buying shares, equity financing needs a company with shares to issue, like a limited company. If the company does well, the investors share in the value you build. If it fails, they lose their money and you don't owe it back.

Companies tend to look at equity when:

• They're early and need money before they have the revenue to repay a loan. Our guide to start-up funding options covers the wider choice.
• The plan is big and risky, like building a new product, and could take years to pay off.
• They want an investor's experience and contacts as well as their money.

A company that sells shares to the public on a stock exchange is also using equity financing. That's called an initial public offering (IPO), and it's usually only an option for much larger companies.

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How does equity financing work for a limited company?

Your company issues new shares to an investor in return for cash, so your own percentage of the company shrinks. In practice that means agreeing a valuation and terms, passing the resolutions your articles need, then allotting the shares and telling Companies House within one month.

The usual steps are:

1. Decide how much you need and what it will get you to, like a product launch or a revenue target.
2. Work out what the company is worth. This sets how much of it each pound of investment buys. Our guide on how to value your company explains the methods.
3. Find investors and pitch to them. Inviting people to invest is regulated, so take legal advice before you promote the round.
4. Agree a term sheet: the amount, the valuation and the investor's rights, like a board seat or a veto on big decisions.
5. Let the investor run due diligence on your accounts, contracts and existing shareholdings.
6. Check your articles of association and any shareholders' agreement, and pass the resolutions they need. Existing shareholders may have the right to buy new shares first.
7. Allot the shares, update your register of members and file a return of allotment (form SH01) with Companies House within one month.

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Equity vs debt finance: the key differences

With equity you give up part of the company but never repay the money. With debt you keep every share but repay what you borrow plus interest, whether or not the business does well.

Debt finance covers business loans, lines of credit, overdrafts and asset finance. They all work on the same principle: you borrow, then repay.

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What does equity really cost compared with a loan?

Equity's cost is the share of future value you hand over, so the more your company grows, the more expensive that money turns out to be. A loan's cost is fixed when you sign: what you borrow plus interest and fees.

Here's an illustrative example. An investor puts in £100,000 for 20% of your company. That values the company at £500,000 after the investment, or £400,000 before it. You keep 80%.

So equity is the cheaper choice when things go badly, because the investor shares the loss. It's the more expensive choice when things go well, because you've sold part of the upside for good.

Control matters too. A shareholder with more than 50% of the votes can pass ordinary resolutions, like appointing directors. Special resolutions, like changing the articles, need at least 75%. In this example you keep 80%, so you still pass both on your own, unless your shareholders' agreement gives investors vetoes. Sell 30% and you'd keep 70%, below the 75% line.

Source: Companies Act 2006, sections 282 and 283. Checked 12 October 2026.

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When debt fits better, and when equity does

Debt usually fits a defined cost you can repay from trading, like stock, equipment or a big order, when you want to keep all your shares. Equity usually fits a big, long-term bet the business can't yet repay, especially before it makes steady revenue.

A loan is likely to suit you if:

• You know what the money is for and roughly when it will pay back.
• Your revenue can cover the repayments, even in a slower month.
• You'd rather keep full ownership and control.
• You need the money in days or weeks, not months.

Equity is likely to suit you if:

• You're pre-revenue or making losses while you build.
• You need a large sum that would be hard to repay from trading for years.
• An investor's experience or network is worth as much to you as the cash.
• You're happy to share the upside, and the decisions that go with it.

Many companies use both at different times: equity for a long-term bet, and a business loan or line of credit for shorter, defined needs. If you already have investors, check your shareholders' agreement first, because some need investor consent before the company borrows.

If a loan fits, an iwoca Flexi-Loan is one option for UK limited companies. It's a business loan with flexible repayment options: you can borrow from £1,000 to £1m over terms up to five years, and repay early with no penalty. A decision is made within 24 hours, but it might be longer depending on the complexity of the request. We take no shares and no property as security at the start, but every new Flexi-Loan needs a personal guarantee from at least one director, so weigh that before you borrow. A Flexi-Loan isn't the right fit if you can't see how the business would repay it from trading.

Some companies grow on borrowing alone. Mark Natthan's CQD Cleaning Services has drawn over 80 fundings from iwoca in nine years, £1.4m in total, and he still owns 100% of the company.

Debt can also fund a deal that people often assume needs private equity. Stephen Murray used a £500,000 iwoca loan for the management buyout of ECF Accident Repair Group:

‘It was so simple compared to the hoops I've had to jump through with private equity in the past. The iwoca deal was quick and no stress.’ — Stephen Murray, Managing Director, ECF Accident Repair Group

If you're raising money to buy a business, manda, iwoca's platform for buying and selling businesses, offers dedicated acquisition financing.

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Types of equity financing

Most UK companies raise equity from friends and family, business angels, equity crowdfunding or venture capital, and later sometimes private equity. Each suits a different stage and size of round.

Friends and family

Friends and family are often the first money into a company. Terms tend to be informal, so write down what they're getting, in shares, and what happens if the company fails.

Business angels

Business angels are wealthy individuals who invest their own money early, often with advice and contacts too. Our guide to business angels covers how to find and approach them.

Equity crowdfunding

With equity crowdfunding, many people invest small amounts through an online platform in return for shares. Our guide to equity crowdfunding explains how campaigns work and what platforms charge.

Venture capital

Venture capital funds invest larger sums in companies that could grow fast, usually in exchange for a board seat and investor rights. Venture capital firms back fewer companies than angels and expect bigger returns.

Private equity

Private equity firms buy into more established, profitable companies, often taking a significant and sometimes controlling stake. They usually aim to improve the business and sell their stake within a few years.

Corporate venture capital and family offices

Some large companies invest in smaller ones for strategic reasons, like access to a technology or market. Family offices invest a wealthy family's money, often with a longer time horizon than a fund.

Mezzanine finance: a hybrid

Mezzanine finance is a loan that ranks behind your main lenders, so it costs more, and it often comes with the right to take shares later. It sits between debt and equity. Our guide to mezzanine finance explains how the structure works.

Going public (IPO)

An IPO is when a company sells shares to the public on a stock exchange for the first time. It raises large sums but brings heavy costs and reporting rules, so it's rarely an option for a small business.

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SEIS and EIS: tax relief for your investors

SEIS and EIS are government schemes that give your investors income tax relief when they buy new shares in a qualifying company, which makes it easier to raise early-stage equity.

Source: gov.uk SEIS, EIS and investor tax relief guidance. The EIS limits apply from 6 April 2026. Checked 12 October 2026.

There are more conditions, including on your company's age, its trade and how you spend the money, so check the gov.uk guidance for SEIS and EIS before you raise. Investors claim the relief, but your company has to keep to the rules or they can lose it. The investor tax relief guidance sets out what they can claim.

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Pros and cons of equity financing

Equity's big advantage is that there's nothing to repay, so cash stays in the business while it grows. The trade-off is permanent: less ownership, a share of future profits and some loss of control.

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Advantages of equity financing

The main advantages are that you don't repay the money and investors carry part of the risk.

• There are no repayments and no interest.
• Investors share the risk. If the business fails, you don't owe them the money.
• Good investors bring experience, contacts and credibility with customers and future investors.
• Investors who back you early may put in more in later rounds.

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Disadvantages of equity financing

The main disadvantages are that the cost is permanent and you give up some say over the business.

• You own less of the company, and each new round dilutes you further.
• Investors share in every future profit and in the sale price, for good.
• You give up some control. Investors with more than 50% of the votes can outvote you, and those with over 25% can block special resolutions.
• Raising takes time and management focus, and you'll pay for legal advice.
• You'll need to report to shareholders regularly.

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Equity financing FAQs

Is equity financing a good idea?

Equity financing is a good idea when you need a large sum for a long-term bet you can't repay from trading yet, and you're happy to share ownership. If the need is defined and your revenue can cover repayments, a loan usually costs you less of the company.

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How long does it take to raise equity?

Raising equity usually takes months rather than weeks, because of pitching, negotiation, due diligence and legal documents. You'll also pay legal fees.

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What are the alternatives to equity financing?

The main alternatives are borrowing, grants and reinvesting your own profits. Borrowing includes business loans, lines of credit, overdrafts, asset finance and invoice finance, and none of them takes a share of your company.