Debt and equity finance
Debt and equity are the two main types of finance available to businesses. Debt finance is money provided by an external lender, such as a bank. Equity finance provides funding in exchange for part ownership of your business, such as selling shares to investors.
Both have pros and cons, so it’s important to choose the right one for your business.
| Funding type | Advantages | Disadvantages |
|---|---|---|
| Debt financing | Retain full ownership No obligations after repayments Cash on hand quickly Interest is tax deductible Short and long term options | Minimal opportunities for small businesses Repayments with interest Often requires collateral |
| Equity financing | No debt repayments Ongoing expertise and advice from investors Investors are prepared to wait for a return on their investment More cash flow available for the business Can provide funding for businesses that can't get a bank loan | Forfeit of a portion of the business and revenue Indefinite payments to investors Ongoing consultation and consideration of investors when making decisions |
Sources of debt and equity finance
Financial institutions
Banks, building societies and credit unions offer a range of finance products – both short and long-term. These include:
- business loans
- lines of credit
- overdraft services
- invoice financing
- equipment leases
- asset financing.
Retailers
If you need finance to buy goods like furniture, technology or equipment, many stores offer store credit through a finance company. Generally, this is a higher interest option. It suits businesses that can pay the loan off quickly within the interest-free period.
Suppliers
Most suppliers offer trade credit. This allows your business to delay payment for goods. Trade credit terms vary. You may only get it if your business has a good reputation with the supplier.
Finance companies
Most finance companies offer finance products through retailers. Finance companies must be registered, so before you get finance, check the Australian Securities & Investments Commission (ASIC) professional registers.
See ASIC's MoneySmart website for a list of companies you should not deal with.
Factor companies
Factor companies provide finance by buying a business's outstanding invoices at a discount. The factor company then chases up the debtors. This is a quick way to get cash, but can be expensive compared to traditional financing options.
Family or friends
If a friend or relative offers you a loan, it's called a debt finance arrangement. Before you decide on this option, think carefully about how this arrangement could affect your relationship.
Self-funding
Often called 'bootstrapping', self-funding is often the first step in seeking finance. It involves funding from your personal finances and business revenue. Investors and lenders will expect some self-funding before they agree to offer you finance.
Family or friends
Offering a partnership or share in your business to family or friends in return for equity is often an easy way to get finance. However, consider this option carefully to make sure it doesn’t affect your relationship.
Private investors
Investors can contribute funds to your business in return for a share in your profits and equity. Investors (such as business angels) can also work in your business to provide expertise and advice.
Venture capitalists
These are often big corporations that invest large amounts in start-up businesses. The businesses usually need to have potential for high growth and profits. Venture capitalists:
- typically require a large controlling share of your business
- often provide management or industry expertise.
Stock market
Also known as an Initial Public Offering (IPO), floating on the stock market involves publicly offering shares to raise capital. This can be a more expensive and complex option. There is also a risk of not raising the funds you need due to poor market conditions.
Check out ASIC MoneySmart website for more information about floating on the stock market.
Government
In general, the government doesn't provide finance for starting up or buying a business. However, you may be suitable for a grant to:
- conduct research and development
- expand your business
- innovate
- export your goods and services overseas.
Find grants and programs for your business.
Crowdfunding
Crowdfunding is way to raise money by asking a large number of people each to invest in or donate to your product idea or project. You generally do this through a crowdfunding website.
There are four main types of crowdfunding you can use to get finance for your business. Each uses a different way to attract funding and may have different tax responsibilities for the parties involved.
Find out what crowdfunding type suits your business best and how to set a campaign up.
Common sources of funding
Three common sources of funding include:
- banks loans
- venture capital
- crowdfunding.
Read more about each type to see if they suit your business and situation.
| Crowdfunding | Venture capital | Business loan | |
|---|---|---|---|
| Funding type | Varied | Equity | Debt |
| Finance provider | Individuals, investors, friends and family | Investors | Banks |
Reasons for seeking finance
Below are some reasons for businesses to seek finance. Read more about the finance options available for each.
Do you need finance to survive tough times? Before you consider going into further debt, first try to improve your financial position. Some options include:
- government grants for disaster-affected businesses
- financial counselling services
- personal counselling services.
You can also talk to investors or a lender about finance options to improve your situation.
Go to the ASIC's MoneySmart website find a free and confidential financial counsellor near you.
Another way of growing your business is by exporting overseas.
Some finance options to help you export include:
- a loan
- venture capital
- bonds, finance and guarantees from Export Finance Australia - if you need help with obtaining a loan
- government grants.
You might need finance to help your business grow, such as improving your goods or services, diversifying your business, expanding or franchising.
Some finance options include:
- a loan
- a line of credit
- private investors such as business angels
- trade credit from suppliers.
You may require finance to purchase stock to sell (your inventory). It is important to consider if you need to pay upfront or when the goods are delivered. If you’re selling goods to businesses, it might be worth asking if larger clients can pay a deposit first to help you financially.
Some finance options to purchase inventory include:
- a line of credit
- a commercial bill.
Need finance to purchase or replace machinery or equipment? Think about whether buying or leasing would suit your business better.
Some finance options include:
- hire-purchase
- chattel mortgage
- fully drawn advance
- leasing.
If you need finances for a property, such as a shop front, factory, or to store your inventory, consider whether it would suit your business better to buy or lease.
Some finance options to acquire property include:
- a loan
- a fully drawn advance
- venture capital
- leasing.
To fund research and development in your business, aside from traditional sources of finance you may be eligible for government assistance.
Some finance options for research and development include:
- government grants
- venture capital
- private investors such as business angels
- crowdfunding.
If you're looking for finance to start a business, whether from scratch or buying an existing business or franchise, some finance options include:
Some finance options include:
- hire-purchase
- chattel mortgage
- fully drawn advance
- leasing.
Investors such as angel investors and venture capitalists may expect some level of self-funding or existing equity in the business before investing.
Whether you need one vehicle or a whole fleet, there are a number of finance options available. Before you choose, decide whether it would suit your business better to buy or lease.
Some finance options for vehicles include:
- a loan
- hire-purchase
- chattel mortgage
- trade credit from suppliers
- leasing.
The free MoneySmart Car app helps you work out the real costs of buying and running a car.
