Balancing debt and equity

There are two types of funding available to small businesses – debt financing and equity financing.

Debt financing is when you borrow money or take out a business loan for your business. Equity financing is when you put some cash into the business yourself, or family/ friends/ investors put money into your business.

Before you seek funding

Work out what the capital requirements are for your business and think about where you can get that capital.

Before you seek funding, look at using your own savings or selling assets to raise money, or restructuring your costs to help you save over time. You can also apply for a grant/incentive to help you grow your business.

As your business develops, it’s likely that you’ll need more funding and you can use a combination of debt and equity financing.

Debt vs equity financing

Debt financing

With debt financing, you retain control of the business and own the profits you make, but you’ll need to pay back the loan, with interest. The interest you pay on your loan is tax-deductible.

You can borrow money from family, friends, or a bank. If you borrow money or accept investment from a family member or friend, remember if anything goes wrong and you can’t pay them back that this can affect your relationship.

It’s important to think carefully about how much you’ll borrow as paying back a loan can be a substantial business expense. You’ll need to be sure you can make your loan payments on time to maintain your credit rating. If you have a good cash flow and can meet loan payments, a business loan can be a good choice.

However, you may have to make loan payments at a time when your business really needs the cash, like during start-up or expansion. In addition, if you guarantee your personal assets against the loan and are unable to make the repayments, you can lose these assets.

Different banks and lenders offer various incentives and fee structures for business loans.

Equity financing

Investors put money into your business and they take the risk that if your business fails, they don’t get their money back. In return for taking this risk, investors will own a piece of your business. Make sure you tell them about any risks involved in your business, so they know there is no guarantee they’ll get their money back.

They’ll expect a share of any profits and you’ll need to consult them on any major decisions.

Investors can also bring valuable and in-depth experience, vision, and connections to your business.

Approaching lenders and investors

You’ll need a business plan to help you present your business case to potential investors or lenders in a credible way. It needs to include:

  • How much money you need and evidence and forecasts to support this.
  • Detailed plans for how the money will be spent.
  • The return on investment you estimate for investors (including the amounts and timeframe).
  • An outline of the business’s ability to repay debts for lenders.
  • Evidence you’ve taken precautions to minimise your capital requirements.
Which is best – debt or equity financing?

Which one is best depends on the type of business you have, your business plan, your financial and tax situation, and potential investors and their tax situation. It’s a good idea to get advice from an accounting professional.

It can be hard to get formal equity financing for small start-ups. In this case, debt financing may be the best option. As your business grows, it may be easier to get equity funding, but you’ll need to be ready to give up a part of your business.

We’re more than happy to discuss your needs and explore where we can help you to balance debt and equity. We also offer business loans to give you a flexible, medium to long-term financing option to help you grow your business. You can find out more and get in touch with us by completing the online form.*

We can also help you find investors both on and offshore, as we have access to one of the largest distribution networks in Australasia, and across the world.