Private Investors vs a Business Loan: Equity or Debt for Your Growth Plan

In short: Money from private investors has no repayments, but for a profitable business it is usually dearer than debt: the investor shares every future dollar of profit and sale value. A loan costs interest and fees, then ends, but it needs cash flow to service it and usually security or a director's guarantee. In our illustrative example, borrowing $500,000 leaves the founder about $1.05 million better off after five years than selling 25% to a private investor.

Key takeaways

Equity costs a share of everything the business earns and is worth, for as long as the investor holds it; debt costs interest and fees, then ends.
In the illustrative example, $500,000 at 9% over five years costs $122,751 of interest; a 25% stake hands the investor about $1.65 million of profit and value.
Debt only works if cash flow services it - lenders test interest cover and debt service cover before they lend.
Private investors usually want board seats, information rights and a say on major decisions; lenders want covenants, reporting and security.
Offering shares to private investors is regulated fundraising, so check ASIC's disclosure rules and exemptions before you pitch.
Mixed structures - part loan, part equity, or a convertible note - can match each dollar to the risk it carries.

What is the real difference between a private investor's money and a loan?

business.gov.au's guide to choosing debt or equity funding puts it simply: debt finance is money you borrow from a lender, and you keep full ownership; equity finance is money you receive in exchange for part ownership of the business. The guide lists the trade-offs - debt means repayments with interest and often collateral, while equity means giving up a portion of the business and its revenue and consulting investors on decisions.

Question	Private investor (equity)	Loan (debt)
What you give	A share of ownership, profits and sale value	A promise to repay with interest
Repayments	None scheduled	Fixed schedule from day one, or interest-only for a period
Cost	Open-ended - it grows as the business grows	Known in advance: interest and fees
End date	None until the investor sells or is bought out	When the loan is repaid
Control	Shared: board seats, vetoes, information rights	Covenants and reporting while the loan runs
Security	None - the investor carries the risk	Business assets, property and often a director's guarantee
If the business fails	Shareholders rank behind creditors	The lender is a creditor and can enforce security

The table already hints at the answer. Equity is expensive when things go well and cheap when they go badly; debt is the reverse. The question is which outcome your growth plan is more likely to deliver, and whether the business can survive the repayments in the meantime.

How do you compare the cost of equity with the cost of debt?

Take an illustrative company earning $600,000 a year before interest and tax (EBIT). It needs $500,000 for a second production line that the owner expects to lift EBIT to $850,000 a year. Everything below is an example to show the method - not a forecast, offer or valuation.

Option A - private investor: a private investor pays $500,000 for 25% of the company. That values it at $1.5 million before the money (pre-money) and $2.0 million after (post-money).
Option B - loan: $500,000 at an illustrative 9% over five years, principal and interest, repaid monthly. The repayment is $10,379 a month, or $124,550 a year.

For simplicity, assume a 25% company tax rate (check your own rate with your accountant), that all after-tax profit is available to shareholders, and that the business is worth four times EBIT, or $3.4 million, at the end of year five. Interest on a business loan is generally tax deductible, which business.gov.au lists as one of debt's advantages; dividends paid to an investor are not.

Year (illustrative)	Loan interest	Loan balance at year end
1	$41,635	$417,085
2	$33,857	$326,392
3	$25,349	$227,191
4	$16,044	$118,685
5	$5,865	$0
Total	$122,751

After the illustrative 25% tax deduction, the loan's interest costs the business about $92,063.

What does each option leave the founder after five years?

Founder's position after 5 years (illustrative)	Option B: loan	Option A: private investor
After-tax profit belonging to the founder	$3,095,437	$2,390,625
Less loan principal repaid from profits	$500,000	nil
Cash the founder can take out	$2,595,437	$2,390,625
Founder's share of a $3.4 million business	$3,400,000 (100%)	$2,550,000 (75%)
Total	$5,995,437	$4,940,625

The loan leaves the founder $1,054,812 better off. Under the loan, after-tax profit is $850,000 less each year's interest, taxed at 25%. Under the equity deal, the founder keeps 75% of $637,500 a year for five years.

The private investor's side reconciles it. The investor collects $796,875 of profit (25% of five years at $637,500) plus a stake worth $850,000 - about $1.65 million for $500,000. The founder's loss is smaller than the investor's gain by $592,063, which is exactly the $500,000 of principal plus $92,063 of after-tax interest the founder would have paid under the loan.

What if the new line fails and EBIT stays at $600,000? The loan still has to be repaid. On the same assumptions the founder ends with $4,057,937 under the loan and $3,487,500 under the equity deal - debt still wins, by $570,437, because this business earns enough to carry it. Debt only loses when the business cannot carry the repayments at all, which is the next test.

Can the business actually service the loan?

Lenders look at two ratios. Interest cover (ICR) is EBIT divided by interest. Debt service cover (DSCR) is cash earnings, usually EBITDA, divided by total annual repayments of principal and interest. The ICR and DSCR calculator works both out and shows the largest loan each ratio supports.

Illustrative business	EBITDA	Annual repayments on $500,000	DSCR
Established company from the example	$900,000	$124,550	7.23x
Early-stage company	$90,000	$124,550	0.72x

The established company's year-one interest cover is 20.4x ($850,000 divided by $41,635). Any lender will be comfortable. The early-stage company would need to find $34,550 a year from somewhere else just to make the repayments, and no responsible lender will set it up to do that. Minimum ratios vary by lender and loan type; as an indicative guide, many commercial lenders look for a DSCR somewhere around 1.25x to 1.5x.

That is the honest dividing line. A business with surplus cash flow should usually borrow. A business whose growth is ahead of its cash flow often has no realistic debt option, and that is where private investors earn their price. Lenders also want evidence the forecast is real - our guide to cash flow forecasts lenders accept sets out what they will rely on.

What control do you give up with each option?

Neither option leaves you entirely alone. The control simply arrives in a different form and lasts for a different time.

Control lever	Private investor	Lender
Who sits on the board	Often one investor-appointed director	Nobody
Major decisions	Reserved matters need investor consent: new shares, big borrowings, asset sales, changing the business	Covenants restrict extra debt, asset sales and dividends
Information	Monthly accounts, budgets, board papers	Annual accounts, sometimes quarterly figures and covenant certificates
Exit	Drag-along and tag-along rights shape any sale	A change of control may trigger repayment
How long it lasts	As long as they hold shares	Until the loan is repaid

A good private investor can be worth the control they take: industry contacts, a second set of eyes on the numbers, credibility with customers and future lenders. A poor fit can stall every decision that needs their consent. Meet them on a bad-news day before you sign, and read the shareholder agreement as closely as the valuation.

What about security, director's guarantees and what happens if things go wrong?

A lender protects itself up front. Expect a general security interest over business assets, possibly a mortgage over property, and very often a director's guarantee - which turns the company's debt into a personal one if the business cannot pay. Our guide to what you sign in a director's guarantee is worth reading before any term sheet arrives.

A private investor takes no security over your house. If the business fails, shareholders rank behind every creditor and usually recover little or nothing. That is the risk they are being paid for, and it is why their price is high.

Directors carry their own exposure either way. ASIC's guide to becoming a company director notes that directors can be personally liable for losses if the company keeps trading when it cannot pay its debts as they fall due. More debt raises that risk in a downturn; more equity lowers it.

What does raising money from private investors involve legally?

Selling shares is fundraising, and the Corporations Act regulates it. ASIC's fundraising overview notes that a proprietary company (no more than 50 non-employee shareholders) can raise from existing shareholders and employees, and from the general public only where the fundraising does not need a disclosure document.

ASIC's page on when a disclosure document is needed lists the main exemptions. One covers personal offers where offers have been made to fewer than 20 persons in the previous 12 months and no more than $2 million is raised in that period - and you must not advertise the offer. Another covers people presumed not to need disclosure, such as sophisticated investors. A certificate from a qualified accountant can show an investor meets the test: net assets of at least $2.5 million, or gross income of $250,000 or more in each of the previous two years. The certificate lasts up to two years.

The rules have more conditions than this summary shows. Get legal advice before you send anyone an information memorandum.

When does each make sense - and can you mix them?

Borrow when the business has surplus cash flow, the use of funds is a tangible asset or a proven expansion, and you want to keep the upside.
Take equity when cash flow cannot carry repayments, the plan is high-risk or long-dated, or a particular investor brings something money cannot buy.
Mix them when the plan has both kinds of risk: equity for product development or market entry, debt or asset finance for the equipment and premises.

Mixed structures are common. A convertible note starts as debt and can become shares. A shareholder loan from a private investor sits alongside their equity and is often subordinated to the bank. Our overview of secured and unsecured business loans helps size the debt part. Lenders often like some private investor equity in the mix: it is a cushion that ranks behind them.

Signalling matters too. Raising equity at a low valuation tells the next investor something; carrying debt comfortably tells a lender something else. When you are ready to test the debt side, compare private investor money with a loan by posting one loan request on ADS, and 200+ verified lenders and brokers can ask about it.

Frequently asked questions

Is it cheaper to borrow or to sell shares to a private investor?

For a business that can service the repayments, borrowing is usually cheaper, because interest and fees end when the loan is repaid while an investor shares profits and sale value indefinitely. In the illustrative example the loan cost $122,751 of interest, while the 25% stake handed the investor about $1.65 million. Equity wins only when the business cannot carry debt or the plan fails badly.

Do private investors have to be sophisticated investors?

Not always, but it matters. Offers to sophisticated investors are one exemption from the disclosure rules; a qualified accountant's certificate can show net assets of at least $2.5 million or gross income of $250,000 or more in each of the previous two years. Small personal offers are another exemption. Other offers may need a disclosure document, so get legal advice first.

Will a bank lend to a company that already has private investors?

Yes, and investor equity can help, because it ranks behind the lender. The lender will read the shareholder agreement to see whether investor consent is needed to borrow or grant security, and who will sign a director's guarantee. Investor directors often decline to give one, so the founder may carry it alone.

Can a private investor lend money instead of buying shares?

Yes. A shareholder loan or private loan from an investor is debt: it has interest, a term and repayment rights, and it does not dilute you. If a bank is also lending, it will usually ask for the investor loan to be subordinated, meaning it is repaid only after the bank. Document the terms properly, including what happens on default.

Is interest on a business loan tax deductible?

Generally yes when the money is used to earn assessable income, and business.gov.au lists deductible interest as one of the advantages of debt. Dividends paid to shareholders are not deductible to the company. The detail depends on your structure and the use of funds, so confirm the treatment with your accountant before you choose.

Sources

Choose your funding: debt or equity — business.gov.au
Fundraising (Chapter 6D, proprietary and public companies) — Australian Securities and Investments Commission
Disclosure documents to be provided to potential investors when raising funds — Australian Securities and Investments Commission
Certificates issued by a qualified accountant (sophisticated investors) — Australian Securities and Investments Commission
Becoming a company director — Australian Securities and Investments Commission

Information current as at 24 October 2026.

General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.

Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.