Balancing debt & equity.
We can advise you about debt and equity funding and help you to decide which one is best for your business.
Debt vs equity funding.
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. It’s worth remembering that if you do borrow money from family members or friends, and you can't pay them back, this may affect your relationship.
Think carefully about how much you'll borrow; paying back a loan can be a substantial business expense. Be sure you can make loan payments on time to maintain your credit rating. If you have a good cash flow and can meet loan payments, you could consider a business loan.
However, loan payments are a drain on your cashflow, particularly during demanding periods like start-up or expansion. And if you use your personal assets (like your home) as security against the loan and can’t make the repayments, you could lose these assets.
Equity investors put money into your business in return for owning a proportion of it. If your business succeeds, they will earn a share of the profits. If your business fails, they probably won’t get their investment back.
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 experience, vision, and connections to your business
Approaching lenders & 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?
The best funding will depend on the type of business you have, your business plan, your financial and tax situation, and potential investors and their tax situation. It is 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.
Things you should know.
Eligibility criteria and lending criteria, terms and conditions apply. An establishment fee may apply.
The material on this webpage is provided for information purposes only and is not a recommendation or opinion.
The material on this webpage is does not take your particular financial situation or goal into account. We recommend you seek independent legal, financial and/or tax advice.
Business Lending products are only available for business and/or investment purposes and not for personal, domestic or household purposes.
The tax information provided in this webpage is general in nature and for illustrative purposes only; it does not constitute tax advice and should not be relied on for tax purposes. You should seek professional advice on the tax implications of your investments based on your particular circumstances. Westpac accepts no responsibility for the tax consequences of investments to you or any third parties.