Debt vs Equity Financing: Choosing the Right Growth Strategy

Access to capital isn’t always the hardest part of growing a business. Knowing what kind of capital you actually need can be.

Debt and equity financing are the two basic answers, and they solve different problems. Debt rents money: you keep the company, and you owe a schedule of payments. Equity sells a share of the company: there is no repayment date, but you own a smaller slice of what you built, and often share decisions. The choice looks simple on paper. In 2026, with interest rates rising and venture dollars heavily concentrated, it is harder than usual.

Debt vs Equity Financing: What Each One Actually Costs

The cost of debt is more than the interest rate. Among firms with debt in the Federal Reserve’s 2025 Small Business Credit Survey, 59% used a personal guarantee to secure it and 51% pledged business assets.¹ Costs can also surprise borrowers: 60% of those who borrowed from online lenders said their actual costs were higher than expected, compared with 37% at small banks and 32% at large banks.¹

The rate environment matters more than it did a year ago. On September 16, the Federal Reserve voted 12–0 to raise its target range to 3.75%–4.00%, its first increase since 2023.² The September minutes say most participants judged another increase likely appropriate by year-end,³ and the median projection for year-end is 4.1%.⁴ The prime rate, which many business loans are priced against, is 7.00%.⁵ The Fed meets again on October 27–28.

Debt also has a tax dimension. Interest is generally deductible, but Section 163(j) caps the deduction at business interest income plus 30% of adjusted taxable income. The One Big Beautiful Bill Act made the more generous EBITDA-based calculation permanent for tax years beginning after 2024, businesses under a gross receipts threshold (about $31 million for 2025) are exempt, and disallowed interest carries forward.⁶ This is general information, not tax advice.

The cost of equity is ownership. Carta’s Q2 2026 benchmarks put median Series A dilution at 18.7%, and its founder ownership report found that founding teams keep about 56% of the company after seed and about 36% after a Series A.⁷ There is no repayment date, but the claim is permanent: investors share in every future dollar of value.

Figure 1: Comparison table, “Debt vs. equity at a glance.”

Who Can Actually Get Each One

Debt is widely sought. Sixty percent of employer firms applied for financing in the year before the survey, most often to meet operating expenses (56%) or to pursue an expansion or new opportunity (46%). Outcomes were uneven: 42% of applicants received the full amount, 36% received some or most, and 22% received none. At the same time, 31% of firms had no outstanding debt, up from 21% in 2020.¹

Equity is abundant in aggregate and concentrated in practice. U.S. venture deal value reached a record $515.8 billion through the third quarter, about 44% above the 2021 full-year record, and AI companies accounted for 82.7% of it, the highest share in the dataset. Only 18 companies went public in the quarter, and established firms captured 88.2% of venture fundraising.⁸ Venture capital is one source of equity, and a narrow one.

Figure 2: Bar chart, “What happened to financing applications (2025 survey).”

What the Largest Companies Show: Mixing Both

Even the companies with the largest cash flows are mixing debt and equity. FactSet’s analysis of five hyperscalers (Alphabet, Amazon, Meta, Microsoft, and Oracle) shows capital spending on track to exceed $690 billion in their fiscal 2026 periods.

Incremental debt rose from 9% of capex in fiscal 2024 to 32% in the 12 months before June 2026, taking aggregate debt to about $700 billion. Equity returned too: in June, Alphabet priced an $84.75 billion equity raise, the largest equity transaction for a listed corporate. Of that, $44.75 billion, including a $10 billion private placement with Berkshire Hathaway, is directed at general corporate purposes such as AI capex.⁹

The mix followed the balance sheet. Total debt to EBITDA remained around 1x or below for four of the five. Oracle, with higher leverage tied to contractual obligations to build capacity, raised $43 billion of debt and $5 billion of equity in fiscal 2026, plans about $40 billion of combined debt and equity for fiscal 2027, and was downgraded by S&P to BBB- in July, citing capex, negative free cash flow, and customer concentration.⁹

Sometimes the structure is set by rule. NFL rules cap the debt used to buy a team at $1.2 billion and require the controlling owner to hold at least 30% of the equity.¹⁰

Five Questions Before Choosing

None of this points to a single answer. It does sharpen the questions:

• How predictable is the cash flow? Debt comes with a schedule. Equity does not.

• What is the money for? An asset that produces cash soon fits a repayment schedule differently than a bet that pays off later.

• What happens in a bad year? Guarantees, covenants, and collateral decide how much room there is.

• What will the ownership be worth later? Interest ends when the loan does. Dilution does not.

• What do rates do to the math? Fixed and floating debt behave differently when the benchmark moves.

What Remains Unclear

The Federal Reserve survey is a convenience sample, fielded from September to November 2025, before this year’s rate increase, so borrowing experiences may have changed since.¹ Carta and PitchBook data describe venture-backed companies, a small slice of the economy, and not the typical small business.⁷ ⁸ The hyperscaler cases are an extreme of scale, and their financing choices reflect balance sheets few companies share. And the rate path is open: officials expect further tightening but say they approach each meeting with an open mind.³

What I find interesting is that the choice is rarely debt or equity in the abstract. It is what a business can predict, what it is willing to give up, and what the next twelve months might do to either. The question I would ask is not which is cheaper, but which risk the business understands better.

Explore more perspectives on capital allocation, business growth, and private markets at johnjezzini.com.

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Sources

¹ Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey, March 3, 2026.

² Board of Governors of the Federal Reserve System, “Federal Reserve issues FOMC statement,” September 16, 2026.

³ Federal Reserve, Minutes of the Federal Open Market Committee, September 15–16, 2026 (released October 7, 2026).

⁴ Federal Reserve, Transcript of Chairman Warsh’s Press Conference, September 16, 2026.

⁵ PrimeRates, “Federal Reserve Meeting Schedule & Prime Rate Decision Dates,” October 2026.

⁶ Pease Bell, “Tax Talk: Interest Expense Limitation (Section 163(j)),” 2026.

⁷ Carta, “Series A funding: How to raise your first priced round,” 2026 (Q2 2026 benchmarks and Founder Ownership Report 2026).

⁸ PitchBook and NVCA, Q3 2026 PitchBook-NVCA Venture Monitor, October 7, 2026.

⁹ FactSet Insight, “Hyperscalers Tap External Financing as AI Capex Outruns Cash Flow,” July 23, 2026.

¹⁰ Yahoo Sports, “Seattle Seahawks sale to Vinod Khosla family officially closes,” September 3, 2026.