Almost every new company needs money before it makes money. Broadly, there are three ways to raise it: borrow (debt), sell part of the company (equity), or use something in between, such as a convertible loan note. Each has different consequences for control, risk and tax. This guide explains the three approaches for start-ups in Scotland, the legal documents involved and how to choose.
In brief
- Debt keeps ownership with the founders but must be repaid, and lenders usually want security or personal guarantees.
- Equity brings in investors as shareholders. You do not repay it, but you give up a share of ownership, profits and often some control.
- Convertible loan notes and advance subscription agreements let you raise money quickly now and set the share price later.
- SEIS and EIS tax reliefs make equity far more attractive to individual investors, but convertible loans do not qualify.
- Whichever route you choose, the paperwork matters: articles, shareholders’ agreements, security documents and Companies House filings.
The three approaches at a glance
| Debt | Equity | Convertible loan | |
|---|---|---|---|
| What you give | A promise to repay with interest | Shares in the company | A loan that usually turns into shares later |
| Control | Founders keep ownership | Investors become shareholders | Dilution deferred until conversion |
| Repayment | Yes, on agreed terms | No | Only if it does not convert |
| Security | Often required | No | Sometimes |
| SEIS and EIS | Not available | Available if conditions are met | Not available |
| Speed and cost | Can be quick for standard products | Slower, more negotiation | Usually quicker than a priced round |
Debt finance
With debt finance, a lender provides money to you or your company and you agree to repay it with interest. Ownership stays with the founders, which is the main attraction. Common sources for start-ups include:
- bank loans and overdrafts;
- government-backed Start Up Loans from the British Business Bank, of up to £25,000 per person at a fixed interest rate, with free mentoring;
- asset finance and leasing for equipment and vehicles;
- invoice finance once you are trading;
- loans from founders, family or friends, which should still be documented properly.
Security and guarantees
Lenders to new companies usually want security. In Scotland, that can include a standard security over land or buildings, a floating charge over the company’s assets, and since 1 April 2025, a statutory pledge over moveable assets such as equipment or intellectual property under the Moveable Transactions (Scotland) Act 2023. Charges granted by a company must be registered at Companies House within 21 days, or they are ineffective against a liquidator or administrator.
Many lenders also ask the directors for personal guarantees. That removes the limited liability protection for that debt, so negotiate a cap and understand when the guarantee can be called. Loan agreements also include covenants, such as financial ratios or restrictions on further borrowing, that the company must keep to.
Equity finance
Equity finance means issuing new shares to investors in return for their money. The investor becomes a part owner, sharing in the upside if the company succeeds and losing their money if it fails. You do not repay equity, but each new share issue dilutes the existing owners.
Worked example
How dilution works
- Founders own100 shares
- Investor invests £100,000 at a £400,000 pre-money valuation25 new shares
- Total shares after the round125 shares
The investor now owns 20% (25 of 125 shares), and the founders own 80%. The company is valued at £500,000 after the investment.
The legal steps
- Authority to allot. Directors need authority to issue shares under the Companies Act 2006. A private company with one class of shares usually has it automatically, unless the articles say otherwise. Otherwise, the shareholders must grant it.
- Pre-emption rights. Existing shareholders have a statutory right to be offered new shares first when shares are issued for cash, unless this is disapplied by special resolution or excluded in the articles.
- Investment documents. Investors normally expect a subscription or investment agreement with warranties about the company, new articles of association and a shareholders’ agreement covering board seats, consent matters, information rights, leaver provisions and exit.
- Filings. A return of allotment (form SH01) must be filed at Companies House within one month, along with any new articles and special resolutions within 15 days.
Our guide to tailored articles of association explains why model articles rarely work once investors are involved.
Convertible loans and advance subscriptions
Convertible loan notes
A convertible loan note is a loan to the company that, instead of being repaid, usually converts into shares when a trigger event happens. Typical triggers are a future equity round above an agreed size, a sale of the company, or a long stop date. The investor normally receives a discount on the price paid by new investors, often between 10% and 25%, and sometimes a valuation cap.
Convertible loans are popular because they can be agreed quickly and avoid arguing over a valuation at a very early stage. The downsides are that they are debt until they convert, they can be called for repayment if no trigger occurs, and they do not qualify for SEIS or EIS relief.
Advance subscription agreements
An advance subscription agreement (ASA) is similar, but the investor pays now for shares to be issued later, with no interest and no right to a refund. A well drafted ASA can qualify for SEIS or EIS, provided it meets HMRC conditions, including a long stop date generally no more than six months away. That makes ASAs a common choice where investors want the tax relief.
SEIS and EIS
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) give individual investors income tax relief and capital gains tax benefits when they buy new shares in qualifying companies.
| SEIS | EIS | |
|---|---|---|
| Income tax relief | 50% | 30% |
| Company can raise | Up to £250,000 in total | Up to £10 million a year (£20 million for knowledge intensive companies) from 6 April 2026 |
| Company age and size | Trading less than 3 years, gross assets up to £350,000, fewer than 25 employees | Gross assets up to £30 million before and £35 million after the issue from 6 April 2026 |
| Investor limit | £200,000 a year | £1 million a year (£2 million if the excess is in knowledge intensive companies) |
It is usually worth applying to HMRC for advance assurance before you raise. Shares must be ordinary shares without preferential rights to assets on a winding up, and convertible loans do not qualify.
How to choose
- Work out how much you need and when. Raising more than you need dilutes you unnecessarily; raising too little means fundraising again soon.
- Decide how much control you want to keep. If keeping full ownership matters most, debt or founder funding may suit.
- Consider your risk. Debt must be repaid even if the business struggles, and personal guarantees put your own assets at risk.
- Think about your investors. If individual investors are likely, SEIS and EIS eligibility may point you towards equity or an ASA.
- Get the structure right first. Equity investment needs a company limited by shares. Our guide to choosing a business structure explains the options.
- Take advice before signing. Term sheets look simple, but they set the framework for everything that follows.
Support is also available from Scottish Enterprise, Business Gateway and other public bodies, including grants and advice for new businesses.
Frequently asked questions
Is it better to borrow or sell shares?
It depends on your plans and risk appetite. Debt keeps ownership but must be repaid. Equity does not need to be repaid but gives away part of the company. Many start-ups use a mix.
Do I need a solicitor for a friends and family investment?
It is strongly advisable. Informal investments cause many later disputes, often because nobody wrote down whether the money was a loan or for shares, and on what terms.
Can a sole trader raise equity investment?
No. A sole trader cannot issue shares. You would need to incorporate a company first, which our business formation team can help with.
What happens to a convertible loan if the company is sold before conversion?
Most notes say they convert immediately before the sale or are repaid with a premium. Check the trigger events and what the investor receives in each case.
Raising money for a new company?
Our business solicitors advise founders and investors across Scotland on loans, share issues, convertible notes and SEIS or EIS rounds, and keep the paperwork clear and proportionate. Call 0141 471 9166 or book a free consultation.
Related services and guides
This guide reflects the law in Scotland as at October 2026. It is general information rather than legal or tax advice, so please speak to us about your own funding plans.