Growth usually costs money before it makes money. New equipment, more stock, bigger premises or a new website all need paying for up front. Many small business owners turn to borrowing to cover that gap. Before you sign anything, it helps to understand the options and what each one really costs.

This guide covers the main types of business finance available in Australia. It explains the difference between debt and equity, where loans come from and how to prepare an application. It draws on guidance from the Australian Government and the Small Business Development Corporation in Western Australia. Rules and products change, so always check current terms with the lender.

Debt finance and equity finance

There are two broad ways to fund a business. The business.gov.au guide to choosing your funding describes debt finance as money you borrow from a lender, such as a bank. You repay it with interest and usually keep full ownership. Equity finance is money you receive in exchange for part ownership of your business.

Each has trade offs. With debt, your obligation ends once the loan is repaid and the interest may be tax deductible. The downsides are interest costs, limited options for small businesses and lenders that often want collateral. With equity there are no repayments, but you give up part of the business and its revenue, and payments to investors can continue indefinitely.

Investors also expect to be consulted on decisions. On the other hand, they can bring expertise and advice and may be willing to wait for a return. Equity can also fund a business that cannot get a bank loan. Many owners use a mix of both.

Where business loans come from

Banks, building societies and credit unions offer business loans, lines of credit, overdrafts, invoice financing and equipment or asset finance. Non bank lenders are finance companies without a banking licence. They often have more flexible criteria but may charge higher rates and fees. The Small Business Development Corporation guide to business finance notes that finance companies must be registered with ASIC.

Business loan brokers do not lend money themselves. They compare lenders and handle the paperwork for you. Some charge a fee while others are paid a commission by the lender. Check reviews before you choose one, and ask how they are paid.

Other sources are easy to overlook. Suppliers may offer trade credit, which lets you delay payment, with terms that often depend on your reputation with them. Factor companies buy outstanding invoices at a discount and collect the debts, which is fast but can be expensive. Retail store credit usually carries higher interest and suits a business that can repay within any interest free period.

Borrowing from family or friends

A loan from family or friends is still debt finance. It can feel easier to arrange than a bank loan, but it can put strain on the relationship. The SBDC suggests a formal written agreement and legal advice. Treat it with the same care you would give any other lender.

Matching the finance to the goal

The right product depends on what the money is for. business.gov.au suggests loans, lines of credit, angel investors and supplier trade credit for a growing business. For vehicles, equipment and tools, it lists loans, hire purchase, chattel mortgages and trade credit. It also suggests weighing up whether buying or leasing suits you better.

Stock is a common reason to borrow. Lines of credit and trade finance are the usual options here. If you sell to other businesses, you could ask large clients for a deposit to reduce how much you need. Checking if you must pay suppliers up front or on receipt of goods can also cut the amount you borrow.

Spending on marketing and your website is part of growth for many businesses. Some owners borrow to fund a new site, while others pay as they go. Reading up on innovative web designing ideas for beginners can help you plan a site that suits your budget. Basic SEO techniques that still work are another way to grow leads without large up front costs.

Exporting and research

Businesses that export may be able to use finance and guarantees from Export Finance Australia, along with loans and grants. For research and development, the options include grants, venture capital, angel investors and the R&D Tax Incentive. The government generally does not finance start ups or business purchases. Grants may be available for research and development, expansion, innovation and exporting.

Preparing a loan application

Lenders want to see that the business can repay. For a business loan, business.gov.au says to prepare financial and bank statements and cash flow projections. An accountant or bookkeeper can help pull these together, though there is usually a fee. Having them ready before you apply saves time.

The SBDC also offers a short checklist. It is worth working through before you speak to any lender. The main points are below.

• Work out how much finance you actually need.
• Develop a sound business plan.
• Consider how long you have to repay.
• Assess your ability to make the repayments.
• Get advice from an accountant or business adviser.

Investors and lenders will also expect some self funding before they offer finance. Putting your own money in shows you share the risk. It can also reduce the size of the loan. Once the loan is in place, the SBDC suggests reviewing your lender relationship each year to check you still have the best terms.

Security and personal guarantees

Debt is often secured against collateral. The SBDC notes this may include business assets or the owner’s property. If the business cannot repay, those assets may be at risk. Before you offer your home or other personal assets, read about ways to protect your personal assets when starting a business and get independent advice.

Interest costs and fees affect the true price of a loan. Compare the full cost over the term, not just the headline rate. Remember that repayments usually start soon after approval and can reduce the cash you have for growth. Ask your accountant about things you could be claiming, since loan interest may be tax deductible for a business.

Watch for finance scams

Scammers sometimes target businesses by claiming they are eligible for, or already approved for, a loan or grant. The business.gov.au site warns that a call or email offering funding you have not applied for is almost certainly a scam. You can check the Moneysmart investor alert list for entities you should not trust. Report suspected scams to Scamwatch.

Frequently asked questions

What is the difference between debt and equity finance?

Debt finance is money borrowed from a lender that you repay with interest. Equity finance is money received in exchange for part ownership of the business. With debt you usually keep full ownership, while equity means sharing the business and its revenue.

Are non bank lenders a good option?

Non bank lenders often have more flexible criteria than banks. They may charge higher rates and fees, so compare costs closely. Research your options and talk to an accountant or business adviser first.

What documents do lenders usually want?

business.gov.au lists financial statements, bank statements and cash flow projections for a business loan. A sound business plan also helps. Your lender will tell you what else they need.

Can I get a government grant instead of a loan?

The government generally does not fund start ups or business purchases. Grants may be available for things like research and development, expansion, innovation and exporting. The business.gov.au grants and programs finder lists what is currently open.

This article is general information only and does not take your personal circumstances into account. Speak with an accountant or licensed financial adviser before taking on business finance.