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What type of finance is best for your business?

What type of finance is best for your business?

Looking to start a business or take the next step and expand your existing one? We outline your options for financing this.

Researching your many options for funding your business can be time consuming. If you’re looking to start a business or take the next step and expand, you have the option of debt or equity finance.

Working out which of these options will work best for your business can be complex, so make sure you know all that’s available to you and when these options may be suitable. Here are some key things to consider along the way.

How much of your own money do you need?

The first thing you need to know is how much money you’ll need. You can get an idea of this by adding up the starting costs of:

  • Rent
  • Equipment and fit-out
  • Inventory
  • Wages and superannuation contributions (including your own)
  • Accounting, legal, administration and marketing costs

By comparing this total amount to the cash you have available, you can gauge how much money you may need to borrow. The less you borrow, the less debt you’ll carry or the less control of your business you will need to hand over. To reduce financial stress, you may want to consider ideas that can save you more money or, if you can, keep working your existing job for extra income.

Another option can be funding from the federal government, which offers grants for some new businesses.

Debt finance

Debt finance is borrowed money that you pay back with interest within an agreed time. The most common forms of debt finance include:

  • Bank loans
  • Overdrafts
  • Mortgages
  • Credit cards
  • Equipment leasing and hire purchase.

Advantages of debt finance

  • You have control over your business and assets as you don't need to answer to investors
  • You don't have to share your business profit
  • Some interest fees and charges on a business loan may be tax deductible – your accountant can advise you on this.

Considerations for debt finance

  • New businesses may find it difficult to secure debt finance without accurate financial records or projections and a comprehensive business plan 
  • You’ll need to generate enough cash to service repayments, fees and interest
  • Regular repayments can affect your cash flow. Start-up businesses often experience cash-flow shortages that may make regular payments difficult
  • If you use an item as security to guarantee a loan, the item could be repossessed should you be unable to make repayments.

Equity finance

Equity finance is investing either your own or someone else's money in your business. The key difference between debt finance and equity finance is that the investor becomes a part owner of your business and shares any profit the business makes.

The main sources of equity capital are:

  • Family and friends
  • Business angels – individuals who invest their own funds (typically up to $2 million) into start-up businesses
  • Crowd funding – this relies on people to donate money to a business
  • Venture capitalists – professional investors who invest funds (generally $2-10 million) in operating companies
  • Public float – raising money by issuing securities (e.g. shares) to the public.

Advantages of equity finance

  • Freedom from debt and no repayments

Considerations for equity finance

  • Shared ownership means you may have to give up some control of your business. Investors not only share profits, they may also have a say in how the business is run
  • Accepting investment funds from family or friends can affect personal relationships
  • You may have to compete with a number of other business for funding from the same source, making it harder to get the cash you need.

What next?

See which type of debt finance may suit your business with our 3-step selector tool or set up a meeting with a CBA Business Banker to discuss your finance options.