Debt vs Equity: Which Funding Path is Right for Your NZ Business?

wisebizcounsel
Aug 22
2 min read

Debt vs Equity concept with money bag and scales on a textured teal and brown background. Bold text and symbols contrast.

1. Why the Choice Matters

Every business reaches a point where growth outpaces cash flow from operations.

Whether it’s buying stock, hiring staff, or breaking into export markets, funding is essential.

In New Zealand, the two main routes are debt (borrowing from banks or lenders) and equity (selling part of your business to investors).

Each option carries different risks, rewards, and long-term consequences.

2. Debt Funding – Borrowing for Growth

How it works: The business borrows money (via bank loans, overdrafts, asset finance, or peer-to-peer lenders) and pays it back with interest.

Pros:
- Ownership remains intact – you don’t give away equity.
- Predictable repayments can help with planning.
- Often cheaper than equity in the long run if cash flow is strong.
Cons:
- Requires security – usually property, business assets, or personal guarantees.
- Repayments can strain cash flow in tough times.
- Banks are conservative in NZ, especially for SMEs without property.

With an OCR trending down, borrowing rates will follow, making this an attractive option.

But Banks prefer established businesses, so newer firms often look to second or third tier lenders. There are risks associated with this, usually and a higher cost of financing as often this is unsecured.

3. Equity Funding – Sharing the Pie

How it works: Investors provide capital in exchange for ownership (shares) in the business. Common sources: angel investors, venture capital, iwi investment funds, or crowdfunding platforms.

Pros:
- No repayment obligations – reduces pressure on cash flow.
- Investors often bring expertise, governance, and networks.
- Suitable for high-growth firms, banks won’t touch.
Cons:
- Dilution of ownership and decision-making control.
- Investors expect returns – usually via a sale, IPO, or buy-back.
- Negotiations and shareholder agreements can be complex.

In NZ, Equity capital is increasingly accessible through angel networks, venture funds, and co-investment by NZ Growth Capital Partners. Many Kiwi start-ups mix local and offshore investors.

4. How to Decide: Debt vs Equity

Cashflow strength: If you can comfortably service repayments, debt may be cheaper and simpler.
Risk appetite: Debt increases financial risk; equity reduces financial pressure but adds governance pressure.
Growth plans: If rapid scaling is the goal, equity investors may be the better fit.
Ownership goals: Do you want to retain full control, or share the journey?

5. Blended Approaches

Many NZ businesses use a hybrid model – for example, securing a bank overdraft for working capital while raising equity to fund expansion into Australia. This balances risk while maintaining flexibility.

Diversifying funding is paramount these days, so not overly dependent on a single source.