Business owners still favour debt as a source for funding in the UK due to suspicion of venture capitalists, according to a new survey.

Although small businesses have seen a major drought in financing over the last few years, the research from business advisory firm Baker Tilly shows that around 80% of directors opted for debt finance.

This is despite the availability of more flexible options such as private equity, the public markets and the use of angel investors.

Company directors have a 'low regard' for the private equity industry, the report reveals, with only 54% of survey participants recommending it to others, while more than a quarter would actively recommend 'avoiding' private equity.

A majority would also consider a management buy-out, with just 15% ruling out the possibility of an MBO.

When a decision has been made to work with private equity, 60% of managers expect private equity investors to introduce them to a strong network.

Exit routes are a strong concern, with most believing a thought-out exit strategy showed that management has a long-term strategic view. There is also the common belief that negotiation skills are the most important skills an advisor should have when selling a business.

"Directors can find that despite an historically close relationship with their bank, equity finance is more flexible than debt, albeit more expensive," said Robert Donaldson, from Baker Tilly.

"Debt is fine as long as the business continues to perform. However, if trading difficulties are encountered, the relationship can be tested. Funding a business using debt rather than equity inevitably exposes a business to greater risk."

Richard Hilton, chief executive of Gymbox, which recently carried out a management buy-out with assistance from Baker Tilly, added: "For most business owners, the key is retaining equity.

"The beauty of having an all debt deal is that you keep 100% of the equity and therefore retain complete control, autonomy and ownership of the business, which hopefully results in you gaining greater reward down the road."

This story was provided by Venturedome.com.