Debt or Equity: How to Finance Business Growth

A business grows and needs money: for a new facility, a fleet, inventory, or entering a new market. There are basically two paths available. You can borrow (debt) or give up part of the business in exchange for money (equity). Both make sense, just in different situations. This article explains the difference in plain language and shows when each option pays off, from a Polish market perspective.

Debt and equity are two different agreements

Before you weigh up the costs, it helps to understand what you're actually signing up for in each case.

When you take out a loan, the agreement is simple: the lender gives you money, you pay it back with interest by an agreed date. Regardless of whether the project succeeds or not, the debt has to be repaid. In exchange, you keep 100% ownership of the business and full control over its decisions. No one sits on your board, no one votes on your growth plans.

Equity works differently. An investor puts in money in exchange for shares in the business. If the business makes money, the investor makes money with you. If the business loses money, the investor loses with you too, because you don't have to pay anything back if the project doesn't work out. The catch is that you give up part of the ownership and part of the vote. The investor may have opinions about strategy, hiring, or even a future sale of the business.

When debt pays off: financial leverage

Financial leverage works when the return on a project financed with debt is higher than the cost of that debt. Example: you take out a loan at 12% a year to finance a real estate purchase that you'll sell for a 25% profit. The difference, 13 percentage points, stays in your pocket, not the investor's.

The more projects you have with a return clearly higher than the cost of debt, the more it pays to finance them with debt rather than giving away equity once and for all.

Leverage cuts both ways, though. If a project returns less than the cost of the debt, or loses money altogether, you still have to repay the loan in full, plus interest. That's why debt only makes sense when you have real confidence, or a very high probability, that the project will earn more than the financing costs.

When it's better to consider an investor

Equity tends to be the better choice when at least a few of the following apply to your business:

• The project is very risky or innovative: a new product, entering a new market, a business model without a proven track record.
• The business doesn't yet have stable cash flow: regular installments could choke it before it starts earning.
• You need more than just money: contacts, industry experience and support for growth, typical of venture funds and angel investors.
• You don't have collateral: no real estate, equipment or other assets you could offer a lender.
• You'd rather share the risk, even at the cost of some profit and control over decisions.

Private debt: a middle path

Between a classic bank loan and giving equity to an investor, there's a third path. It's private debt, meaning private debt financing from outside the banking sector. Funds, family offices and specialized lending firms provide financing on debt terms: you repay the capital with interest, you don't give up equity, but with a flexibility a bank doesn't offer. A faster decision, an individual assessment of the project, fewer rigid formal requirements.

It costs more than a bank loan, but less than permanently giving away part of the business to an investor. We cover how it actually works and what it really costs in our article on what private debt is.

How this looks at PozaBankiem

PozaBankiem's entire offering, meaning loans secured by real estate, factoring and leasing, is debt financing. We don't come into the business as a shareholder, we don't ask for a board seat, we don't share in your business's profit. We provide capital for a set period, on clear terms, secured for example by real estate or invoices, and you keep full ownership and control of the business.

For a business owner who wants to grow but doesn't want to give up part of the business to an outsider, this is often the simplest path. A loan secured by real estate for a purchase or investment, factoring to improve liquidity, leasing for equipment or a fleet. If a project needs a more complex structure, for example a separate company set up for one specific investment, it's worth reading how that works in practice in our article on financing through a special purpose vehicle (SPV).

How to decide, step by step

1. Work out the expected return on the project and compare it with the cost of debt. If the return clearly exceeds the cost of financing, debt is probably worth it.
2. Check the business's cash flow. If there isn't stable income to service installments, consider an investor or financing that doesn't require regular repayments.
3. Ask yourself whether you're willing to give up part of the control. If not, look for debt-based solutions.
4. Check what collateral you have. Real estate, invoices, equipment. No collateral often means a higher cost of debt or the need to look for an investor.
5. Consider a middle-path solution, like private debt, if the bank says no and giving up equity feels premature.

There's no single right answer to whether you should finance growth with debt or with equity. It depends on how confident you are in the project's return, how much collateral you have, and how much control over the business you're willing to give up. In many cases, debt, meaning a loan, factoring or leasing, is a good compromise, because it lets you grow without sharing the business with anyone.

Frequently asked questions