Quick answer
Raising equity gives away part of your business permanently in exchange for money you don't repay; borrowing keeps ownership but requires repayments from cash flow. For Australian founders with predictable revenue and short payback on growth spending, debt can be cheaper in the long run. For pre-revenue or high-uncertainty ventures, equity shares the risk. Many businesses use both at different stages.
Key points
- Equity costs a share of every future dollar; debt costs a known amount over a known term.
- Debt needs cash flow to service; equity needs investors who believe in outsized upside.
- Predictable revenue favours debt; long development and uncertainty favour equity.
- The cheapest capital depends on how valuable the business becomes.
Founder culture can make raising money look like the only path. Pitch decks, term sheets and funding announcements get the attention. Yet most Australian businesses are built without venture capital, and many that could raise choose not to. The real question isn’t “can I raise?” but “what does each option actually cost me?”
How do debt and equity really differ?
| Equity (raising capital) | Debt (borrowing) | |
|---|---|---|
| What you give up | A share of ownership, permanently | Nothing, as long as you repay |
| Repayment | None; investors profit from future value | Principal plus cost of finance over a term |
| Cost if the business does well | Very high — a share of all future value | Fixed and known |
| Cost if the business fails | Investors share the loss | Usually still owed, possibly with guarantees |
| Control | Investors may get board seats or veto rights | Lender has no say in running the business, subject to terms |
| Best suited to | Long development, high uncertainty, outsized upside | Predictable revenue, clear payback on spending |
Neither is inherently better. They suit different businesses at different stages.
What does dilution cost in real money?
Dilution feels abstract until you put numbers on it. Here’s a simplified illustration.
Illustrative only. A founder owns 100% of an online brand. She needs $150,000 to fund a big production run and marketing push.
Option A: Raise equity. An investor offers $150,000 for 20% of the company, valuing it at $750,000 after the investment. She now owns 80%.
Option B: Borrow. She takes a facility for $150,000 and, for this illustration, assumes a total cost of finance of $25,000 over the term. She repays $175,000 from cash flow and keeps 100%.
Now fast-forward. If the business is later sold for $3,000,000:
- Under A, the investor’s 20% is worth $600,000. She keeps $2,400,000.
- Under B, she repays $175,000 along the way and keeps the full $3,000,000.
In that scenario, the equity cost $600,000; the debt cost $25,000 plus the strain of repayments. But if the business had failed, under A she’d owe the investor nothing, while under B she might still owe the lender. That’s the trade-off in a nutshell.
This example deliberately ignores tax, timing and the value an investor might add. Use your own numbers and a real quote for the cost of finance; we don’t publish rates because every facility is priced individually.
When does debt make more sense?
- Revenue is predictable. Subscription income, repeat customers or steady sales.
- Spending has a clear payback. Stock that sells, ads that earn back acquisition cost within months, a hire that lifts revenue. The ad-spend payback calculator tests this.
- You want to keep control and ownership.
- The valuation on offer is low relative to what you believe the business is worth.
If that sounds like your business, see what you might qualify for. It’s a 60-second enquiry without a credit check.
When does equity make more sense?
- Revenue is years away, as with deep tech, biotech or platforms that must scale first.
- The upside is huge but uncertain, so sharing the risk makes sense.
- Investors bring more than money — expertise, networks or credibility.
- Cash flow can’t support repayments without starving growth.
Equity usually requires a company structure with shares. The sole trader to company page covers that step.
Can I combine them?
Many businesses do. Common patterns include:
- Equity first, debt later. Raise to build the product, then borrow to scale once revenue is predictable.
- Debt to extend runway. Use debt to reach the next milestone before raising, so the raise happens at a higher valuation and costs less dilution.
- Non-dilutive extras. Grants and the R&D Tax Incentive alongside either route, where eligible. For companies under $20 million turnover, business.gov.au says the R&D offset is refundable and equals the company tax rate plus an 18.5% premium.
What questions should I ask before choosing?
Before you commit to either route, answer these honestly:
- How soon does the money come back? If spending turns into revenue within months, debt is easier to carry. If it takes years, repayments will compete with growth.
- What happens in a bad year? With debt, repayments continue. With equity, investors share the pain but also expect a say.
- How much control matters to you? Some founders are comfortable with a board and investor reporting; others value running their own race.
- What’s the business worth today? Raising at a low valuation is expensive dilution. Borrowing to reach a higher valuation first can change the maths.
- Who else is involved? Co-founders, partners and anyone sharing guarantees or property should be part of the decision.
There’s no shame in either answer. The mistake is choosing by default, because it’s what everyone around you seems to be doing.
Keep more of what you’re building
If your business has the revenue and payback to support debt, borrowing might let you grow without selling a piece of the company. Tell us what you’re planning. There’s no credit check to enquire, your details stay with one real person rather than being spread across lenders, and we’ll call to talk through whether debt suits your stage. Please be accurate on the form — revenue, time trading and any property — so we can match you properly. For the full landscape, read startup funding options in Australia.
Frequently asked questions
What is dilution?
Dilution is the reduction in your ownership percentage when a company issues new shares to investors. If you own 100% and sell 20% to raise money, you now own 80% of a hopefully more valuable company.
Is debt always cheaper than equity?
Not always, but often for businesses that grow. Debt has a known cost. Equity's cost is a share of all future value, which becomes very expensive if the business succeeds. If the business fails, equity investors share the loss, while debt usually still has to be repaid.
Can a startup use both debt and equity?
Yes, and many do. A common pattern is equity to fund early development, then debt to fund growth once revenue is predictable. Some founders use debt to extend the time before a raise, so they raise at a higher valuation.
Do investors care if I have business debt?
They'll want to know about it. Sensible debt used for growth with clear repayment is usually fine; heavy debt that consumes cash flow can put investors off. Be transparent in any raise.
What about grants and the R&D Tax Incentive?
They're non-dilutive and worth pursuing where eligible, but they're usually specific, competitive or paid in arrears. Treat them as part of the mix rather than a replacement for either debt or equity.