Written byFunding is the capital a business uses to start, run or grow, raised as debt, equity, grants or alternative finance.
Also known as: business funding, capital raising
Key points
- Debt keeps ownership and control with you and the interest is usually deductible, but repayments must be met whatever the month brings.
- Equity brings capital without repayments, and often expertise, but dilutes ownership and gives investors a say through a shareholder agreement.
- Government grants are not usually repaid, but funding can be clawed back if you breach the agreement, and many count as assessable income.
- Match the source to the need: working capital gaps suit debt or invoice finance, while uncertain early revenue suits equity.
Why businesses raise it
The reason shapes the structure. Start-up capital builds a prototype, hires the first staff and pays for a launch. Growth capital funds a push into new markets or a step up in scale. Seasonal gaps and short-term payables call for something revolving rather than a long term loan.
Then there is buying or replacing an asset, where equipment finance matches repayments to the working life of the machine. Acquisition finance buys another business, a bridging loan covers the wait for receivables to land, and refinancing cuts the cost of existing debt or tidies up a stack of facilities.
Debt, equity and everything between
Debt is borrowed capital repaid with interest, from banks, non-bank lenders, credit unions and online lenders. You keep control, the repayment schedule is predictable, and interest is generally deductible for a business. Against that, repayments press on cash flow, lenders want creditworthiness and security, and covenants can narrow your options.
Equity sells a share of the business to angels, venture capital, private equity or a strategic partner. Nothing has to be repaid, but ownership is diluted and investors carry expectations about milestones, governance and an exit. Convertible notes and preference shares sit in between, deferring the valuation conversation at the cost of more complex documents.
Where the money comes from
Banks suit established businesses with strong financials, through term loans, overdrafts and business lending. Non-bank and fintech lenders decide faster and underwrite more flexibly, usually at a higher cost. Venture capital targets high-growth ventures, angels bring early money plus mentoring, and private equity handles buyouts and growth capital in mature businesses.
Beyond that, crowdfunding raises small amounts from the public, invoice discounting and receivables finance release cash tied up in unpaid invoices, merchant cash advances draw on future card sales, and asset finance covers machinery and vehicles. Peer-to-peer platforms suit small loans and short gaps.
What it costs and what it commits you to
Compare the full cost, not the rate: establishment fees, ongoing facility fees, early repayment penalties and legal costs. On the equity side the cost is dilution, plus the advisory and legal bill for running the round.
Look closely at the obligations as well. Lenders may impose financial covenants, take charges over company assets and ask directors to stand behind the debt personally, so check the PPSR and get legal advice before signing. Investors bring exit timelines, milestones and board involvement. Fast money with tight repayment terms can strain trading, so run a downside case first.
Not to be confused with
- Funder
- the funder is the party providing the capital, not the capital itself
Frequently asked questions
Can I get funding with bad credit?
There are options, including non-bank lenders, asset-backed finance and invoice finance, but they cost more and usually call for stronger security or directors standing behind the debt. Clearing defaults and building a trading record widens the field over time.
How long does it take to get a business loan?
It depends on the lender and how complete the file is. Current financials, a clear use of funds and a clean credit history move things along, while a valuation, security documents or missing paperwork add steps. Lenders also differ in how they assess and how much of it is automated.
Do I have to give up equity to raise capital?
No. Debt, grants, invoice finance and asset finance all leave your ownership intact. Equity makes more sense when repayment ability is limited, the growth path is uncertain, or you want a partner who brings expertise and networks as well as money.
Are interest payments tax deductible?
Interest on borrowing used for business purposes is generally deductible. The treatment depends on how the funds are actually used, and returns paid to shareholders work differently. Check the ATO's guidance or ask your accountant about your own situation.
Who registers security on the PPSR?
The lender does. Where a facility involves a general security agreement or a security interest over specific assets, the lender registers on the PPSR to protect its priority against other creditors and in an insolvency. You can search the register yourself to see what is already registered against your assets.
Related terms
Business loan
A business loan is finance for business operations, capital expenditure or growth, repaid with interest, either over an agreed term or as a revolving limit you draw and repay.
Read definitionWorking capital
Working capital is the difference between a business's current assets and current liabilities: the measure of whether it has enough liquid resources to meet obligations due within 12 months.
Read definitionAsset finance
Asset finance is the umbrella term for business finance that pays for vehicles, equipment and other income-producing assets, with the asset itself acting as the security.
Read definitionAlternative finance
Alternative finance is any business finance sourced outside traditional bank lending, such as marketplace lenders, crowdfunding platforms, invoice financiers and other specialist non-bank lenders.
Read definitionGovernment grants
Government grants are non-repayable payments from federal, state or local government to eligible businesses, not-for-profits or individuals to fund defined projects or outcomes under set program conditions.
Read definitionEquipment finance
Equipment finance is business finance used to buy or lease machinery, vehicles and other equipment, where the equipment itself secures the loan or is owned by the financier.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.