Bank debt or equity for a growing SME

For a growing SME, bank debt is cheaper and does not dilute you, but it must be repaid whatever happens. Equity follows no repayment schedule, but it takes a share of the value you create. The deciding factor is not the interest rate: it is what happens to your cash flow if the project runs six months late.

I spent eight years assessing business loans at a bank in Namur, then watched an invest (a Walloon regional investment company) come into the capital of an SME in Hainaut from the financial controller's desk. Both sides of the table. Here is the comparison I wish someone had handed me before each of those meetings.

The two options, criterion by criterion

One row is often missing from this kind of table: the personal guarantee. On the bank side, I asked for them. A fund that takes equity does not, it shares the risk. For an owner whose house is already pledged, that single criterion can settle the matter.

Should you borrow or open your capital?

Borrow if the project pays back quickly. Open your capital if it does not.

An industrial project does not generate cash on the day it is financed. Between ordering a production line and running it at full capacity, several quarters often go by. During that time, 100% debt financing means paying the instalments out of the cash generated by the existing business. If margins drop at the same moment, the pressure builds fast.

So the question is not "which is cheapest?". It is "what happens if the project is six months late?". If the answer puts the company under strain, a portion of equity or quasi-equity is needed.

Control is feared more than it should be. A minority fund does not take over management. It asks for a board seat and a list of reserved matters: selling a major asset, new borrowing above a threshold, bringing in a new shareholder. That list is negotiable. It is what you should read, not the percentage alone. I go into this in what a fund on your cap table changes.

What does each option really cost?

Debt costs interest. Equity costs a stake. To compare them, you have to put both into numbers on the same project.

An example built for illustration: a profitable SME needs to finance a €3M expansion. I have assumed straight-line repayment over 10 years for the calculation. Interest rates vary by bank and by file, and I am not going to invent them.

Dilution in package B is easy to work out: investment divided by (pre-money valuation + investment). With €1M invested, you give up 25% at a €3M pre-money, 20% at €4M, 14.3% at €6M and 10% at €9M. These valuations are assumptions. Yours will be negotiated.

Package A is the cheapest if everything goes to plan. Packages B and C give you headroom if it does not. C suits an owner who does not want to open the capital and whose company already makes positive EBITDA. Its trap: the subordinated million comes back at maturity, in one go, and you need to have planned for it from day one.

Before choosing, three checks I had run on every file:

• stress-test the repayment plan with a six-month delay and a drop in margin;
• ask the bank what level of equity it expects in order to finance the project;
• compare total cost over the full term, not just the rate.

And three mistakes I saw far too often: financing a long-term investment with short-term debt, ruling out equity on principle when a minority investor does not take control, and draining cash to avoid borrowing. Working capital matters too.

Covenants versus reserved matters: two kinds of control

People often contrast the bank, which supposedly stays out of your business, with the fund, which supposedly moves into your boardroom. Both halves of that picture are wrong.

An investment loan comes with financial covenants: a leverage ratio not to exceed, a level of equity to maintain, sometimes a ban on paying dividends while the loan is outstanding. I have drafted them. If a ratio is breached, the bank can renegotiate, demand extra security or, at worst, call the loan in. It is silent control, the kind you only notice on the day it is triggered.

The fund controls openly: a board seat, a list of reserved matters, exit clauses. That control gets discussed at every meeting, but it does not cut off your financing overnight.

Read both contracts with the same care. Covenant thresholds are specific to each bank and each file, and they are not published anywhere.

Can you combine a bank and a fund?

Yes, and it is the most common case. Equity and quasi-equity do not just replace part of the debt: they let the bank lend more, because they absorb losses before it does.

Two Walloon invests spell it out. Sambrinvest describes its subordinated loans as having a "financial leverage effect" with bankers, on its financing solutions page. Invest.BW states on its partnership page that it never finances the whole of a need on its own, and that sharing it with the bank creates that leverage. ORSA, for its part, publishes a subordinated loan of €500,000 to €2.5M (the Smart Bond), checked on 15.10.2026, and sets out how it sees the choice on its bank debt or equity page.

In practice, the discussion happens three ways: you, the bank, the fund. Whether your bank is BNP Paribas Fortis, Belfius, ING or KBC, its lending criteria stay internal. None of them will give you a "legal" equity ratio, because there is no such thing. Ask for theirs, for your file. Arriving with a fund's agreement in principle makes the loan easier, and the bank's agreement in principle makes the fund's entry easier. I have seen that back-and-forth decide more files than the rate itself.

In Brussels, finance&invest.brussels (the Brussels-Capital Region's public financing arm) publishes interventions of up to €5M for SMEs, co-investing alongside banks and private funds. In Flanders, the public equivalent is PMV, whose terms I have not checked.

The verdict, profile by profile

If the bank has already said no, the reason for the refusal points to one exit or another: I set out the options in the bank refuses to fund my expansion. To see which fund publishes which instrument and ticket size, the ranking of investment funds for SMEs covers the nine players checked.

The decision depends on your accounts and your articles of association. Have the scenarios tested by your accountant before you choose.