Throughout history, man's ambition to grow has been fuelled by one thing – money. It is arguable that the amount of investment in a business is broadly proportionate with its rate of growth. Investment monies now come from a variety of sources – private finance, bank debt, institutional and hedge fund investment and the company's own cashflow. The choice is wider than ever and record levels of money are being raised for private equity investment. Only recently private equity house Gresham raised £340m in a month.

The reason venture capital was set up in the first place was to plug what became known as the 'equity gap' – the difference between what could be raised by traditional debt sources (historically lent against the security of a company's own assets) and how much money private owners could put in themselves.

Over time, a model has developed which allows both debt and equity to be applied together, usually from different sources – a bank providing debt facilities and a separate private equity house providing the balance.

Although funding the same project, the dynamics are such that both providers of finance come at the same issue from very different risk perspectives and are arguably never entirely happy bedfellows. One only has to observe the colourful debates over intercreditor issues to realise this.

Nevertheless, the benefits to business finance, the enterprise culture and the UK economy as a result of a thriving private equity industry are well documented. In its 60-year history, venture capitalists have established themselves as the kings of management buy-outs and other leveraged transactions, with more than half of all UK M&A deals having this dual finance model.

It might not always be the case in the future though; banks are apparently fighting back. Since 2000, Bank of Scotland, one of the most high-profile banks in the leveraged UK market, has been developing an alternative model, which is their integrated finance product. Now other high street lenders are developing their own version of it. In essence, this is a one-stop shop where the bank provides the debt and equity in one and in a way that directly takes on some of the basic assumptions of the private equity/ dual finance model.

In its six-year history, Bank of Scotland Integrated Finance (BOSIF) has completed more than 90 deals, providing funding in excess of £6bn in private equity deals of a value ranging from £10m to £350m.

Despite these statistics, they are a relatively new competitor for venture capitalists who have up until now seen the integrated finance solution as largely for relatively low-growth businesses. Or it has been seen as a potential home for exits by themselves as seen in the growth of secondary and tertiary buyouts where the banks have taken on the funding.

However, as BOSIF's recent backing of the management buy-out (MBO) of shirt retailer TM Lewin has demonstrated, the integrated finance model can be used to take on the venture capitalists and beat them to the deal.

So both options are available to businesses. The key question is which one to go for. The answer depends on who asks the question. Both models are a means to make that fundamental step change to new ownership but work better for different individuals. Both have advantages and benefits.

Aspects of integrated finance

. It provides a one-stop shop – one source of funding with one decisionmaking process.

. The model is by its nature long term, spread over a longer period than the typical MBO model, and valuations are led by management, who are best placed to determine this.

. It leaves management in majority control of the equity and usually requires only a small percentage of equity to be surrendered, with returns coming from a mix of fees, interest, redemption premium on debt and the capital gain (hopefully) on that equity 'kicker'.

. Integrated finance houses generally do not require a seat on the board of the investee company for themselves (although they may often suggest experienced non-executive additions from their own network of contacts).

. It avoids some of the more swingeing tax issues which affect management equity on venture capital deals.

Rob Freer, a director of BOSIF, says this means that the integrated finance model holds the following benefits for management teams:

"First and foremost, management remain in control of their own destiny. By holding a shareholder majority and an ability to refinance, they retain strategic and operational control of their own business," he says.

"Meanwhile, they have a highly supportive and knowledgeable partner. They are not being constantly pushed for an exit date.

Overall, Integrated Finance provides flexible funding and a fixed price model, where management get the benefit of outperforming their own business plan which venture capitalists cannot match."

Mainstream private equity

. The venture capitalist will invest in a percentage of the equity based on an agreement with management as to the value of the business, the funding requirement and the amount required from the venture capitalist. This can be highly flexible through the use of ratchets and other incentivisations.

. Like the integrated finance model it allows, through financial engineering, for management to retain a sizeable equity stake (whether a minority or majority interest depends on the funding requirement) for a relatively low investment, the so-called 'envy ratio'. It means no matter the size of the deal, the management remain critical to the deal.

. Venture capitalists will expect a preferential yield on their investment (but behind bank via debt) via interest, dividends and sometimes a disproportionate allocation of sale proceeds, but are looking for managers to similarly benefit from increased shareholder value.

. Venture capitalists will actively look for an exit within three to five years from their investment by requiring a sale or floatation of the business, but will look to help that process through their own networks, experience and distribution channels.

. They will want representation at the board level either via its own employee and/or non-executive directors parachuted into the business to complement the new management team.

Simon Kelsall, an investment director at leading venture capitalists Barclays Ventures, advocates private equity on the basis that: "Equity finance has developed significantly over the years. We are essentially risking our money on the strength of the management team, its business plan and the position of the business in its market and we take big risks.

"The dual financing of transactions is a good thing, as it is dangerous to have all your eggs in one basket. Private equity adds more than money. We can also increase the reach of a business through our own networks and by complementing the management team with top quality non-executive and executive directors.

"We are also involved in the business and provide an objective perspective and build a relationship with management to ensure they have focus and remain challenged."

Which one of these appeals to an investee business depends on the motivation for seeking the investment, the expectations as to their trading prospects and the chemistry between the individuals.

The good news is, however, that there is plenty of appetite for investment and a genuine choice as to the type of funding package for the ambitious.

Peter McLintock is head of corporate at Hammonds in Birmingham.