Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
When you’re ready to grow your business - whether that’s opening a new location, launching a product, or smoothing out a cash flow dip - the big question is how to fund it. Most Australian founders quickly land on the same fork in the road: should you raise money through debt or equity?
There’s no one-size-fits-all answer. The path you choose can affect control, risk, cash flow, tax outcomes and how easy it is to raise the next round.
In this guide, we’ll explain the difference between debt and equity financing, the pros and cons of each, the key legal documents you’ll need, and a simple framework to help you decide what’s right for your stage and strategy. This is general information only - always get independent legal and tax advice for your circumstances (an accountant can help with tax treatment).
What Is Debt vs Equity Financing?
At a high level, debt financing is borrowing money you must repay (usually with interest) on a schedule. Equity financing is raising money by issuing ownership in your company in return for funds.
Debt Financing - The Basics
Debt financing includes bank term loans, overdrafts, credit cards, asset finance, invoice finance and private loans. You keep ownership, but you take on a legal obligation to make repayments and meet covenants, regardless of how sales are tracking.
In Australia, many business loans are secured. That means the lender takes security over company assets (and sometimes requires a director’s personal guarantee) and registers that interest - typically on the Personal Property Securities Register (PPSR). If you default, the lender can enforce its security, which may include taking possession of secured assets.
Equity Financing - The Basics
Equity financing is selling a portion of your business to investors. They become shareholders and share in the upside (dividends or capital gains on exit). There are no mandatory repayments, but you are trading a slice of ownership and, often, a say in key decisions.
Common sources include friends and family, angel investors, venture capital funds, equity crowdfunding and, for more mature businesses, public listings. Early-stage companies also use hybrid instruments like convertible notes or SAFEs that convert into shares later.
Debt Financing In Australia: How It Works
Typical Debt Options
- Term loans: fixed or variable rate loans repaid over a set term for fit‑out, equipment or growth.
- Overdrafts and lines of credit: revolving facilities to smooth out cash flow.
- Asset or equipment finance: the asset itself is used as security.
- Invoice finance: advances against your receivables.
- Private loans: funding from directors or related parties.
Security, Guarantees And Enforcement
Most business lenders mitigate risk by taking a security interest over company assets, specific equipment, or both. Directors of SMEs are often asked to sign a personal guarantee. It’s important to understand what’s at stake before you agree - the risk can extend beyond the company if a guarantee is called in.
Where security is granted, it’s standard practice for lenders to register their interest on the PPSR. If you’re on the borrowing side, check what assets are being secured and that you can meet the obligations comfortably.
Costs And Tax
Debt carries interest and fees. In many cases, interest on business borrowing is tax‑deductible, but deductibility depends on your specific use and structure - speak with your accountant about your position. Don’t rely on general guidance for tax outcomes.
When Debt Can Work Well
- You have predictable cash flow to service repayments.
- You’re funding a specific, revenue‑generating asset or project with clear payback.
- You want to retain full ownership and control.
- You can provide acceptable security without jeopardising personal assets.
Equity Financing In Australia: How It Works
Typical Equity Options
- Friends and family: informal early support (still needs proper paperwork).
- Angels: experienced individuals investing their own capital, often with mentorship.
- Venture capital (VC): institutional funds backing high‑growth startups with larger cheques.
- Equity crowdfunding: raising smaller amounts from a large pool of investors.
- Public markets (IPO): for scale‑stage businesses with robust governance and disclosure.
Dilution, Control And Governance
Raising equity dilutes existing shareholders. Investors may ask for board seats, veto rights on major decisions, information rights and specific reporting. That’s not a negative - experienced investors can add significant value - but you should agree who decides what, how often you report, and what the exit pathways look like.
When Equity Can Work Well
- You’re pursuing rapid growth and need significant capital upfront.
- Cash flow is lumpy or pre‑revenue, making debt repayments risky.
- You want strategic support, networks and credibility alongside capital.
- You lack assets to secure a loan or want to avoid personal guarantees.
Hybrid Instruments
Convertible notes and SAFEs are popular at seed and pre‑seed. These instruments are debt‑like now (or simple promises), converting into equity later on agreed terms. They still require careful drafting so both sides are aligned on valuation mechanics, conversion triggers and investor protections.
Debt vs Equity: How Do You Choose?
Start With Your Business Model And Stage
- Cash flow profile: steady and predictable models suit debt; uncertain or pre‑revenue often point to equity.
- Capital need: small, defined purchases can match term loans; large growth plans may require equity.
- Control and ownership: if retaining control is paramount, lean debt (within safe limits).
- Risk tolerance: debt increases fixed obligations; equity spreads risk but dilutes ownership.
A Simple Decision Lens
- If repayments fit comfortably into worst‑case cash flow and security is acceptable, consider debt for discrete investments.
- If repayments would stretch the business or you need strategic partners, consider equity.
- If you need flexibility now and a priced round later, explore a well‑drafted convertible note or SAFE.
- Often, a blend works best - for example, raise equity to build the product, then use asset finance to scale distribution.
Common Scenarios
- Equipment‑heavy service business: asset finance or term loans secured against the equipment can be efficient.
- Software startup pre‑revenue: seed equity (or a convertible) may be safer than taking on fixed repayments.
- Established retailer opening a second store: a mix - modest equity from existing shareholders plus a fit‑out loan - can balance risk and control.
Legal Documents And Compliance To Get Right
Whichever path you take, the paperwork matters. Clear, compliant documents protect your interests, reduce disputes and keep you onside with regulators like the Australian Securities and Investments Commission (ASIC).
For Debt Financing
- Loan Agreement: sets out amount, interest, fees, covenants, repayment schedule, events of default and enforcement rights. Use a properly drafted Loan Agreement that reflects the commercial deal.
- Security documents: general security agreement or specific security over assets, with PPSR registration. If you’re taking security from a customer, consider how you’ll register a security interest.
- Personal guarantee: common for SMEs. Read carefully - a director’s guarantee can put personal assets at risk. See more about personal guarantees and how to manage that risk.
For Equity Financing
- Share Subscription Agreement: records the issue of new shares to investors, price, representations, warranties and conditions precedent. Use a tailored Share Subscription Agreement.
- Shareholders Agreement: governs decision‑making, share transfers, pre‑emptive rights, dispute resolution and exit terms. If you have co‑founders or investors, a Shareholders Agreement is essential.
- Company Constitution: the rulebook for your company. Make sure your Company Constitution and cap table match the terms agreed with investors.
- Disclosure and fundraising rules: understand when you can rely on small‑scale personal offers or sophisticated investor exemptions under section 708 of the Corporations Act.
- Hybrid instruments: if you’re issuing a SAFE or convertible note, ensure conversion mechanics, valuation caps and triggers are clearly drafted to avoid surprises. If you’re raising a full round, consider your broader capital raising strategy.
Don’t forget post‑completion filings. Share issues and company detail changes usually require ASIC notifications within set timeframes. Keep your registers and cap table up to date to avoid downstream friction.
Key Risks And How To Manage Them
Taking On Unsustainable Debt
Fixed repayments can strain cash flow. Stress‑test your model, negotiate realistic covenants and build buffers. If a lender requests a guarantee, assess the personal risk before signing.
Unclear Investor Expectations
Handshake deals are risky. Align on valuation, governance, information rights, vesting for founders and exit expectations before funds are wired. Use robust, consistent documents so there’s no gap between what was agreed and what’s enforceable.
Security Overreach
Be clear what assets are being secured and whether that restricts future borrowing. If multiple lenders are involved, intercreditor issues can become complex - get advice early.
Dilution And Down‑Rounds
Future capital raises can dilute founders further, especially if performance lags. Model ownership under different scenarios before you commit and ensure pre‑emptive rights and anti‑dilution terms are negotiated with care.
Compliance Gaps
Missing ASIC filings, misusing exemptions, or issuing shares without proper approvals can cause costly clean‑ups (or worse). Build a simple compliance checklist for each raise and stick to it.
Tax Surprises
Interest deductibility, franking credits, CGT outcomes and ESS (employee share scheme) tax can materially change your net position. Work with an accountant on your specific tax treatment - don’t assume general rules apply to your case.
Key Takeaways
- Debt financing keeps you in control but adds fixed obligations and may involve security and personal guarantees; equity financing shares risk and brings partners into decision‑making.
- Match the funding type to your cash flow, growth plan, risk tolerance and the importance of retaining control at this stage.
- If you choose debt, ensure your Loan Agreement, security documents and any guarantees are clear and proportionate to the risk.
- If you choose equity, align expectations with a solid Share Subscription Agreement, a Shareholders Agreement and a Company Constitution that reflect how you want to operate.
- Understand Australia’s fundraising rules (including section 708 exemptions) and keep ASIC filings and registers up to date for every transaction.
- This is general information only - get tailored legal and tax advice before signing anything. The right structure and documents will save time, money and stress.
If you’d like a consultation about debt vs equity financing - including documents, fundraising rules and practical next steps for your business - you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.








