Debt and equity: Two sides of the SME capital coin

Australian small and medium enterprises (SMEs) are grappling with a cost of doing business crisis, partly driven by high-interest rates. In a high-cost environment, a balanced capital structure is even more essential for growth-focused SMEs, enabling them to strategically leverage both debt and equity, depending on their growth stage and aspirations. 

The business case for debt  

Traditionally, debt financing has been the go-to choice for SMEs because it offers a clear advantage: predictability (i.e. a set and structured repayment schedule). Debt also allows business owners to maintain control over their business. Debt financing is also generally more accessible, especially in Australia, where total outstanding credit to SMEs rose from $461 billion in 2022 to $644 billion in 2024, accounting for half of Australia’s business lending, according to the Australian Banking Association.  

It’s no surprise, then, that Australian SMEs are three times more likely to seek debt over equity, with nearly half using debt for cash flow management and 41% for asset upgrades.  

While debt has clear advantages, credit providers are reluctant to provide capital for growth without security (and therefore only 31% of SMEs seek debt to fund business growth), and debt’s limitations become more pronounced in a high-interest rate environment.  

As Anthony Healy, CEO of the Australian Business Growth Fund (ABGF), explained in an interview with The Australian, “the sustained rise in borrowing costs has intensified cash flow challenges for SMEs. Businesses adjusting to a prolonged period of higher borrowing costs and increased debt burdens, access to [equity] funding for SMEs is more critical than ever.” 

How SMEs can leverage equity to fuel growth 

Equity financing offers a flexible, growth-focused alternative for SMEs, providing capital without the burden of fixed repayments.  

This is especially valuable for businesses aiming to scale, as equity frees up cash flow to invest in growth areas, such as new market entry, infrastructure, and product development, without the need for immediate returns. Equity is particularly advantageous for projects where revenue may take time to materialise, supporting a business’s ability to plan and execute ambitious goals over a longer timeline. 

De-risk and reinvest in the future

Beyond cash flow relief, equity financing enables founders to realise some of the financial value they have built in the business, allowing them to de-risk personally while reinvesting strategically. This also positions the business well for leadership transitions, as equity investors can bring stability and support before, during and after periods of change.  

Secure patient capital without losing control

As the only purpose-built growth capital fund dedicated to the SME sector, ABGF was established to address these specific needs. ABGF provides patient, minority-only equity funding – typically investing between $5 million and $15 million, with an investment horizon of up to 10 years. This approach allows founders to retain control while ensuring that businesses have the necessary capital to scale sustainably. ABGF’s patient capital is uniquely suited to SMEs that require time and flexibility to achieve their growth ambitions, without the immediate pressures of buyouts or rapid repayment. 

In addition to long-term equity funding, ABGF connects SMEs with an extensive network of industry experts and strategic resources, improving governance and operational capabilities that underpin long-term resilience and competitive advantage.  

Building a balanced funding mix 

For many SMEs, a blended approach of debt and equity financing is optimal.  

Australia’s leading banks, six of which co-founded ABGF alongside the Federal Government, have played a key role in supporting SMEs through expanded business lending programs. These institutions have helped SMEs access vital credit lines, enabling them to manage cash flow, invest in asset upgrades, and maintain stable operations, even amid challenging economic conditions.  

Equity funding from an active and experienced investor, on the other hand, offers the flexibility and support needed for transformative growth, leadership transitions, and de-risking personal financial exposure. Together, debt and equity create a resilient financial structure, helping SMEs manage immediate needs while positioning them for future growth opportunities. 

In today’s high-cost environment, a balanced mix of debt and equity is essential for ambitious, growth-focused SMEs. This approach equips them to adapt, expand strategically, and contribute meaningfully to the economy, ensuring they’re ready to thrive in a complex, competitive landscape. 

 

Can ABGF assist your business?

The Australian Business Growth Fund (ABGF) is an active provider of patient, minority growth capital for Australian businesses with over $2 million in revenue and a proven business model.

It only takes a conversation to understand if your business is ready for growth capital with ABGF.