Owners decide much of what they’ll keep from a sale years before they sell. A funding round dilutes the owner. A holding company can lower the tax on the gain. An owner who buys another business faces separate financing and approval rules.
Types of growth funding
| Type of funding | How it operates | Stage where it is common |
| Bank term loan | A set sum borrowed and paid back over an agreed period, often with security or a personal guarantee | Stable trading with predictable cash flow |
| Invoice finance or asset-based lending | A lender advances cash against unpaid invoices, stock or machinery | Fast-growing sales that tie up cash |
| Venture debt | A three- to four-year loan. The lender also takes a warrant, which lets it buy shares later at a set price | Venture-backed companies between equity rounds |
| Mezzanine loans | A loan repaid after the bank’s, often with warrants or other equity rights attached. Its total return is usually 10%-30% a year | Buyouts and acquisitions |
| Angel and venture capital | Investors buy new shares in the company | Early growth, before profits |
| Growth and private equity | Sale of a minority or majority stake | Expansion, acquisitions or a partial exit |
A loan leaves the owner’s stake intact. The business still has to service it from predictable cash flow. Equity investors take more risk and want shares in return. Every round they join dilutes the owner before a sale. Once revenue is stable, most companies move more of their funding to debt.
Lending and equity conditions in 2026
Gross bank lending to smaller UK businesses increased 9% to £68 billion in 2025. Challenger and specialist banks provided 60% of it. An owner should approach more lenders than the company’s own bank.
The Bank of England cut its rate four times in 2025. The last cut, in December, took it to 3.75%. It has held the rate since then. The next decision is due on November 5, 2026.
Smaller companies received £12.3 billion across 2,002 deals in 2025 (17% fewer deals than a year earlier). Seed-stage deal volume declined by 27%. Growth-stage investment increased by a tenth, so a company with steady revenue will find investors more easily than a new business.
Public funding schemes in the UK
Public schemes lower the cost of funding or make a lender more willing to lend. Most come from the British Business Bank or take the form of tax relief for investors.
| Company the scheme is for | Scheme | What the company gains |
| An established business that needs a facility of up to £2 million | Growth Guarantee Scheme | The government guarantees 70% of the facility to the lender. The borrower still owes the whole debt. In July 2026, the government announced a turnover limit of £54 million, up from £45 million. Loans of up to £1.1 million will also qualify for terms of up to 10 years |
| A business trading for less than 60 months | Start Up Loans | Personal loans of up to £25,000 (fixed at 7.5%), repaid over one to five years |
| A company less than three years old, raising its first equity | Seed Enterprise Investment Scheme | Investors receive 50% income tax relief, so they accept early risk more readily. The company can raise up to £250,000 |
| A young company raising larger equity rounds | Enterprise Investment Scheme | Investors receive 30% income tax relief, which makes larger rounds easier to fill. Since April 2026, the company can raise up to £10 million a year and £24 million in total |
| A company that wants to reward staff without spending cash | Enterprise Management Incentives | Tax-favored share options offer employees a reason to remain and preserve cash for growth. From April 2026, companies with gross assets of up to £120 million and 500 employees qualify |
How an acquisition is financed
An acquisition rarely comes out of one source of money. A buyer spreads the price across lenders, the seller and its own investors. Earlier borrowing can limit the senior debt available, since a growth lender may already hold security over the buyer’s assets.
| Element of the price or its funding | Who provides it | Ranking and risk |
| Senior debt | A bank or debt fund | Repaid first and secured on the target’s assets |
| Mezzanine loans | A specialist lender | Repaid after senior debt, so they cost more |
| Vendor loan notes | The seller, as deferred price | A fixed debt that the buyer owes regardless of the results |
| Earn-out | The seller, as contingent price | Payable only if the business meets agreed targets |
| Buyer’s equity | The buyer or its investors | Ranks last. This is the cash the buyer itself puts in |
Vendor loan notes and an earn-out reduce the cash a buyer must find on completion. They also show that the seller trusts the business. The CMS European M&A Study 2026 found an earn-out in 27% of the 601 European deals that CMS advised on in 2025.
Warranty and indemnity insurance pays the buyer’s claims for breaches of the seller’s warranties. The same study found it in 39% of UK deals, the highest share in Europe. A seller with this insurance can distribute the proceeds without holding back a reserve for claims.
An example of the funding split
In this hypothetical purchase of a mid-sized company, the buyer borrows half the price. The seller defers part of the remainder through loan notes and an earn-out.
| Example: funding of a £12 million acquisition | Amount in the example |
| Senior debt | £4.8 million |
| Mezzanine loans | £1.2 million |
| Vendor loan notes | £1.2 million |
| Earn-out over two years | £1.8 million |
| Buyer’s equity | £3 million |
The seller receives three-quarters of the price on completion. A quarter depends on the buyer’s ability to pay the notes and on the results after completion. Sellers negotiate the security for the notes and the earn-out targets as closely as the price.
How the price is fixed
Under completion accounts, the parties correct the price after completion from accounts drawn up at that date. A locked box instead fixes the price from an earlier balance sheet. The seller promises that no value has left the company since that date.
A locked box gives the seller certainty and puts the risk of the interim period on the buyer. In the CMS study, 48% of European deals used a price adjustment in 2025. Among the rest, 54% used a locked box.
Structuring the group before a sale
Business Asset Disposal Relief needs at least 5% of the shares and voting rights for two years before a sale. If a funding round dilutes the owner below 5%, an election can preserve the relief on the gain to date.
| Point | Rule in October 2026 | Consequence for planning |
| Share sale or asset sale | A buyer of shares pays 0.5% stamp duty. A buyer of assets pays stamp duty land tax (SDLT) on any property it acquires | A seller of shares is taxed once and may claim relief on the gain. A buyer of assets leaves the company’s past liabilities behind |
| Individual seller | Business Asset Disposal Relief charges 18% on the first £1 million of qualifying gains in a lifetime. Other gains bear 24% | The relief is worth at most £60,000 per person |
| Corporate seller | The substantial shareholding exemption exempts a gain on a trading subsidiary held at 10% or more for 12 months | A holding company can sell a subsidiary and reinvest the proceeds without tax on the gain |
| Dividends within the group | Most dividends that a UK company receives are exempt | Profits can be paid up to the holding company before a sale |
| Earn-out paid in cash | The right to future payments is taxed at completion on its estimated value | Tax may be due before the money arrives |
| Earn-out paid in shares or loan notes | The gain is deferred until the securities are sold | Suitable when the seller remains in the business |
| Sale to an employee ownership trust | Since November 26, 2025, half of the gain is taxable | The option remains favorable but is no longer tax-free |
| Interest on acquisition debt | The first £2 million of net interest a year is deductible for any group | Larger interest costs are limited to 30% of taxable earnings |
A holding company above the trading business is the usual preparation, since the corporate seller rule depends on it. Owners normally insert it through a share exchange. HM Revenue & Customs (HMRC) can challenge that step if a main purpose was to obtain a tax advantage.
A commercial reason, for instance to keep valuable assets away from trading risk, makes the step defensible. Advance clearance from HMRC confirms the position. HMRC must reply within 30 days of a complete application.
Groups with foreign lenders or subsidiaries
A UK borrower must withhold 20% tax from interest it pays to a lender abroad, unless a treaty or an exemption removes the charge. Groups that lend across borders face further questions on treaty access and interest caps. The guide to cross-border business financing answers them.
A group counts as medium-sized with fewer than 250 staff (and turnover below €50 million or a balance sheet below €43 million). Medium-sized and small groups are largely exempt from UK transfer pricing rules. The government consulted on removing the exemption in 2025 but kept it.
Approvals to plan into the timetable
The National Security and Investment Act names 17 sensitive areas. A buyer needs government approval before it takes more than 25% of a company active in one of them. Turnover plays no part in the test, so small technology companies are often caught.
A deal completed without approval is void. The penalty can reach 5% of worldwide turnover. Once the buyer notifies the deal, the government has 30 working days to clear it or open a full review.
In March 2026, the government decided to add water to the list and to split critical minerals and semiconductors into separate areas. It plans to lay the regulations later in 2026.
Merger control
Merger control is voluntary in the UK. The Competition and Markets Authority can still review a deal when the target’s UK turnover exceeds £100 million. It can also act where the parties supply 25% of a product and either of them has UK turnover above £10 million.
FAQ
Should the business borrow or sell shares to fund an acquisition?
Borrow, if the combined business will produce enough cash to service the debt with a margin. Interest is deductible within the corporate interest restriction. A loss-making target, or a plan that lenders won’t finance, calls for new equity instead.
When should a holding company be created?
Long enough before a sale for the holding company to meet the ownership period of the substantial shareholding exemption. An early reorganization is also easier to justify on commercial grounds. Since November 26, 2025, HMRC can make just and reasonable adjustments against tax avoidance through a share exchange.
Can a lender ask for a personal guarantee under the Growth Guarantee Scheme?
Yes, lenders under the scheme may ask for one in line with their normal practice. They can’t take the borrower’s main home as security within the scheme, the British Business Bank says.