Structured Credit Instead of Equity for UK Scale-Ups

Raising growth capital in the UK can feel like choosing between two imperfect options: take the dilution, or take the down round. But there is a third lane many scale-ups overlook. Mezzanine and structured credit can be priced against cash-flow coverage, and for companies past venture scale but short of a clean equity round, that structure can sometimes beat a dilutive raise on cost, control and covenant terms. The catch? Cheap-looking money only stays cheap if you read the fine print. Intercreditor position, warrant coverage and prepayment terms are exactly where the apparent savings can be priced back in. This post is for UK founders and CFOs weighing private equity, mezzanine and structured credit against an equity raise. We'll cover why the UK scale-up funding gap is real, what each route actually is, how cost and control compare, how covenants work, and what to check before signing. We'll also walk through a placement process and finish with when each route tends to make sense. If you are balancing dilution against a down round, this is the comparison you need before you sign.

Why the UK Scale-Up Funding Gap Is Real

The British Business Bank's 2026 venture capital report, covering more than 2,200 funds, says some of the UK's fastest growing businesses still lack the capital they need to become global leaders. That's the gap in one sentence, and it hits companies with revenue and a track record.

Public capital is already active here. The BBB told the Commons in September 2025 that it deployed £1.2bn of public capital in 2024/25 and supported £2.6bn of guaranteed lending. That's a live market, not a blank sheet.

The bigger number is the unlock: £6.8bn for SMEs, of which £3.0bn was private capital crowded in. Over the past decade the BBB reports £26bn of private capital mobilised against £6.3bn of government investment. Your facility is most likely filled by private money.

Policy points straight at your stage. The Statement of Strategic Priorities, published 21 October 2025, includes scaling promising businesses and making finance markets work better for smaller businesses. The BBB calls itself a catalyst that crowds private capital in, not a substitute for it.

Longer-dated money is arriving. British Growth Partnership Fund I hit a £200m first close, signalling pension capital being structured into growth companies. The same report notes UK later-stage returns have largely closed their historic gap with the US, which shifts how providers price your deal.

Private Equity, Mezzanine and Structured Credit: What's the Difference?

Right, the jargon.

Private equity simply means capital invested into private companies rather than listed ones, usually through funds, in return for shares or an ownership stake. That covers everything from a growth cheque to a buyout.

At your stage it is mostly growth equity and minority capital. It buys shares, wants a multiple back and needs a route to an exit. That required return is why a down round hurts you more than it hurts the fund: your reset mark is their entry price, and you carry the signal.

Mezzanine sits between debt and equity. It is subordinated capital, often with an equity-linked sweetener such as warrants, and it is typically priced against your cash-flow coverage rather than a headline valuation. That makes it a genuine alternative to a priced round.

Structured credit is a bespoke facility, built around your cash flows, covenants and repayment profile. Two companies with similar revenue can be offered very different pricing. There is no rate card to look up.

A down round is just a priced raise below your previous valuation. It resets the reference point for every future raise, your option pool and any earlier anti-dilution term, so the cost is not only the shares you issue today.

The queue matters. Senior debt gets paid first, mezzanine and structured credit sit behind it, and equity sits last. Where you rank is the most useful thing to understand before comparing anything else.

The structuring conversation is, in practice, work conducted in confidence until a term sheet lands.

Cost: Pricing Structured Credit Against an Equity Raise

Compare the same cash out of the business, not the same headline rate. Equity sells a permanent slice of future value. Credit charges a coupon and fees for a set term, then the upside is yours again.

Model the credit's all-in cost before you get excited: margin, arrangement and legal fees, the value of any warrant coverage, plus the drag of covenants that shape how you run things. A thin margin with heavy warrants is not cheap money.

Model the dilution just as hard. Price the round, apply anti-dilution terms from earlier rounds, and convert the result into percentage points of the cap table and real pounds at exit. That's the number to set against the facility's all-in cost.

Then price what a down round does beyond shares: re-priced options, staff holding grants well underwater, and a weaker seat at the table next time you talk to investors.

One discipline point. Public capital deployed at £1.2bn in 2024/25 and £2.6bn of guaranteed lending show the market is open. They say nothing about your deal's pricing, so keep your model and the market commentary in separate columns.

Cost is only half the story. Next, control.

Control: Boards, Consents and Who Actually Holds the Pen

Cost is only half the argument though, because the other half is control, and it is rarely where you expect it.

Equity investors take control through the board and reserved matters, not just their share percentage. A 12% holder with a board seat and a veto over budgets holds more of the pen than a 20% holder without one. Compare the governance package on each route, because ownership and control rarely move together.

Credit providers usually stay out of the boardroom. But consent rights buried in covenants bite just as hard: new debt, disposals, dividends, acquisitions. Same lever, different room.

Test your freedom to raise again. Check whether the documentation restricts a future equity round, a bolt-on acquisition or a change of control. A facility that blocks your next raise is not cheaper at any price.

Then find out what happens on a breach. Step-in rights, board observers, information covenants and enforcement terms are where quiet lenders turn loud.

Finally, think about the internal read. Employees and existing investors often treat a down round as a signal about momentum, while a debt facility registers as an ordinary financing decision. That difference shows up in hiring and retention.

Next, the covenant terms themselves.

Covenants: The Terms That Decide Whether Cheap Money Stays Cheap

Control gets the headlines. Covenants do the actual work.

Read the covenant package before you look at the coupon. Leverage ratios, interest coverage, minimum liquidity and revenue tests are what constrain how you run the business day to day, long after the term sheet is filed away.

Then ask one question: maintenance or incurrence? Maintenance covenants get tested every quarter whether you do anything or not. Incurrence covenants only bite when you take a specific action, like raising new debt or selling a division.

Definitions beat headline ratios. Adjusted EBITDA, add-backs, how one-offs get treated and the currency you test in decide whether a 3.0x test (an illustrative example) is generous or tight.

Price the cure. Can a breach be fixed? How many cure periods do you get, what waiver fees or pricing step-ups apply, and does a missed test accelerate the whole facility?

Then stress test it yourself. Run a downside model with a slow quarter or a delayed contract and see which covenant trips first. Finding that out after signing is the expensive way to learn it.

Next, the fine print where the real cost hides.

The Fine Print: Intercreditor Position, Warrant Coverage and Prepayment

Once you know which covenant binds first, the next job is reading the documents underneath it.

Where you rank

Intercreditor position settles who gets paid first. Check what security each lender holds and how standstill and enforcement rights are shared with any existing senior lender before you bolt on another layer. Adding a facility without that mapped is how founders find themselves ranked behind someone they didn't know was there.

Warrants

Warrant coverage is mezzanine's real cost, dressed up as a sweetener. Model the percentage of fully diluted equity the warrants represent and the exercise price, then add both to your cost of capital. Check the mechanics too: strike, vesting, whether they survive a change of control, whether they reset on a future round, and what happens if you repay early.

Prepayment

Prepayment terms decide your exit. Look for call protection, make-whole provisions and prepayment premiums, and confirm you can partly repay from cash flow without penalty.

The headline traps

Price the bits that make a facility look cheap at signing: arrangement fees, ticking fees on undrawn amounts, exit fees, and any accelerated repayment triggered by a change of control.

Next: a checklist you can take into the room.

A Pre-Signing Checklist for Founders and CFOs

With the fine print mapped, pull the whole package into one view.

One-page package test

Put coupon, fees, warrant coverage, covenants, security, prepayment and consent rights in a single column, then drop your equity alternative beside it. Total each side as one all-in number. If the credit only looks cheaper because the warrants sat in a separate tab, it isn't.

Get counsel in early

Send the intercreditor agreement to your own lawyers while the term sheet is still non-binding. Once it converts, your leverage shrinks fast. It also helps to line up four stages, led personally with advisers who read these documents for a living.

Stress test three ways

Run a plan case, a downside case and a same-day refinancing. For each, note which covenant binds first. Do that before you agree a testing date, not after.

Check the next raise

Confirm new money is permitted, where the facility ranks, and how existing investors will read a debt layer sitting behind their shares.

Ask the awkward ones

What triggers enforcement? What cures exist? How has the provider handled documentation when a portfolio company missed a test? Ask now, in writing.

Then compare the two routes with real numbers.

What a Placement Process Looks Like in Practice

Once the checklist is done, the placement itself is a structured exercise, not a call around the market. You define the instrument, build the model and covenant package, then approach a targeted group: institutional allocators, family offices, sovereign capital. That is bridging private capital with enduring opportunity, and it is deliberate rather than scattergun.

SENS Capital Partners runs this as a standing practice, designing, structuring and placing equity, mezzanine and structured-credit issuances, alongside capital introduction and, through four stages, led personally, cross-border structuring and offshore vehicle formation.

The firm's own record to date exceeds $240 million in total transaction value across direct capital, private equity funds and venture capital, so it has sat on both sides of the equity versus credit conversation.

Because the instrument is bespoke, most of the value sits in reading the fine print and matching terms to your cash flows. Covenant modelling and legal review belong in the same room as the introduction, not bolted on afterwards. That is also the four stages, led personally approach: advisory work runs alongside the placement, not after it.

If you are past venture scale but short of a clean equity round, treat the placement process as a way to create optionality. Price a facility and an equity round side by side before you choose.

Conclusion: When Each Route Tends to Make Sense

So which way do you go? It comes down to two honest questions about your own business.

If your revenue is predictable and cash flow can comfortably cover a coupon, and holding on to ownership before your next clean round matters, price mezzanine and structured credit alongside the equity option. Run both through the same model and compare honestly.

If growth is still lumpy, or you want an investor's balance sheet and expertise next to the money, an equity round may be the better trade, dilution and all. That isn't a failure, just a different bargain.

Whichever way you lean, value the fine print first. Intercreditor position, warrant coverage, prepayment and covenants are where an apparently cheaper facility quietly costs more than the shares you avoided.

Start with your own downside model, then ask every provider two questions: what triggers enforcement, and what happens if we miss a test. Those answers tell you more than any headline rate.

Get counsel into the documentation before you sign. The gap between a term sheet and a signed facility is where most of the surprises live.

Price both routes, then pick the one your downside case can live with.