Most founders come to us with the raise already decided. They want £2m, they want it in eight weeks, and they want to know which investors to call. The instrument — bond, loan note, equity, SEIS/EIS — is treated as paperwork to be settled later.
It is the wrong order. The instrument decides who can invest, what they are promised, what happens if the plan slips, and how much of the company you still own at the end. Choose it last and you spend the raise explaining a structure that does not fit the business.
Here is how the four routes actually differ.
Bonds
A bond is a promise to pay a fixed return over a fixed term, usually secured against an identifiable asset. The investor is a creditor, not an owner. They have no say in how the business runs and no upside if it triples in value.
That trade suits a business with predictable cash flows and something to secure against — property, plant, receivables, inventory. It suits the issuer too: you keep the equity. What it demands is discipline. A coupon falls due whether or not the quarter went well, and a missed payment is a default, not a difficult conversation.
Bonds are the right answer when the business can service debt and the founder does not want to sell the company in slices. They are the wrong answer for anything pre-revenue.
Loan notes
A loan note is debt with the paperwork loosened. Term, rate, security, conversion rights and repayment triggers are all negotiable in a way a listed bond’s are not. That flexibility is the point.
It works where the funding need is specific and time-boxed — bridging a property development to completion, funding a purchase order, carrying a business to a milestone that will re-rate it. Convertible notes add the option to turn debt into equity at a later round, which lets you defer the valuation argument until you have more evidence.
The flexibility cuts both ways. Loosely drafted notes accumulate into a capital structure nobody can explain, and the next investor will find it in diligence. If you issue notes, keep one register and keep it current.
Equity and IPO
Equity buys permanent capital and shares the risk. No coupon, no repayment date, no default. In exchange the investor takes ownership, usually governance rights, and the return that comes with them.
It is the honest instrument for a business whose outcome is genuinely uncertain. If you cannot say with confidence that you will make the payments, do not promise them.
A public listing is the same trade at a different scale, with a reporting burden attached. It raises the profile and opens a deeper pool of capital, but it is a commitment to a standard of disclosure that runs for as long as the listing does. Founders who treat an IPO as a fundraising event rather than an operating change tend to find the first year unpleasant.
SEIS and EIS
SEIS and EIS are UK government schemes offering investors substantial tax relief on qualifying early-stage investments. For a young UK company they can transform the arithmetic: the relief materially reduces the investor’s downside, which makes a hard conversation easier.
The qualifying conditions are strict and unforgiving — company age, gross assets, employee numbers, trade type, use of funds, and how long the investor holds. Fall outside them, or breach them after the fact, and the relief can be withdrawn from investors who did nothing wrong. Advance assurance from HMRC before you raise is not optional in practice.
This is the one UK-specific route of the four. Everything above travels.
Choosing
Three questions settle it more often than not.
- Can the business service a fixed payment? If yes, debt is available and you keep your equity. If no, promising one is a structural problem, not an optimistic one.
- Is there something to secure against? Security widens the investor pool and lowers the cost of capital more than almost anything else you can do.
- How certain is the outcome? The more uncertain, the more the risk belongs with equity holders who are paid for taking it.
What we see most often is a structure chosen for what it signals rather than what it does — a bond because it sounds institutional, equity because a founder has heard debt is dangerous. Investors read structures for a living. A mismatch between the instrument and the business is the first thing they notice, and it costs credibility before anyone reaches the numbers.
Settle the instrument first. The rest of the raise gets easier.
Related reading
- What is a loan note, and how does it work?
- SEIS and EIS: the differences that matter when you raise
- Debt or equity: which should you raise?
Mark Johnson is the Founder of BDM Capital, which introduces capital raising opportunities across bonds, loan notes, IPOs and SEIS/EIS. To discuss a raise, get in touch.
Frequently asked questions
Yes. Bonds, loan notes, equity and SEIS or EIS each attract different investors with different expectations. Choosing the instrument first defines who to approach and avoids reshaping the deal around whoever happens to say yes.
By asking whether it can service debt, whether it has security to offer, how long the money is needed, how much control the owners will share, and whether its investors can use UK tax relief. The answers point to the instrument.
It can, but it usually costs time and credibility because documents, investor lists and terms all have to be rebuilt. Settling the instrument early is cheaper than changing it late.
BDM Capital is not authorised or regulated by the Financial Conduct Authority. This article is general information, not financial, tax or legal advice, and does not constitute an offer or invitation to invest. Capital is at risk and you may get back less than you invest. Tax treatment depends on individual circumstances and may change. Written for founders and directors of businesses considering a raise. Take independent professional advice before making any investment decision.
