The difference between debt and equity finance


Two of the main types of finance available are:

  • Debt finance – money provided by an external lender, such as a bank, building society or credit union.
  • Equity finance – money sourced from within your business.

Sources of debt 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.

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.

Sources of equity finance


Self-funding

Often called 'bootstrapping', self-funding is often the first step in seeking finance. It involves funding from personal finances and your 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.

Government

In general, the government doesn't provide finance for starting up or buying your business. However, you may be suitable for a grant. For example for:

  • research and development
  • business expansion
  • innovation
  • exporting
Use our tool to find grants and assistance 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. It usually done through online.

Some websites offer a crowdfunding platform for your product idea or project.

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.

Donation-based crowdfunding

In donation-based crowdfunding, a contributor makes a payment to your business without receiving anything in return. This is generally used to raise money for one-off projects.

Reward-based crowdfunding

In reward-based crowdfunding, you give the contributor a reward, (such as goods or services or a discount), in return for their payment.

These could be:

  • goods
  • acknowledgement
  • discounts on future purchase of the product you are developing

For example, you could say that for every donation of $10, you’ll acknowledge the donor on your product website. For every donation of $20, you’ll discount 5% off the purchase of your product.

Equity-based crowdfunding

Equity-based crowdfunding (also called crowd-sourced funding) is a way for small to medium-sized companies to raise money for their business. Typically from a large number of investors that invest small amounts of money. Each investor can invest up to $10,000 a year in a company and in exchange they’ll receive shares in the company.

Learn more about crowd-sourced funding on the Australian Securities & Investments Commission (ASIC) website.

Debt-based crowdfunding

This is where a contributor lends money to your business and you agree to pay interest and repay principal on the loan.

Guide to business funding

Learn more about sources of funding in the Australian Small Business and Family Enterprise Ombudsman’s (ASBFEO’s) FitsME – Essential Guide to Business Funding.

This guide for small business owners provides:

  • an overview of the funding products available to help you make the best choice for your business
  • steps to increase your chance of securing funding