Quick answer
Taking on an investor brings in capital without repayments or a mortgage on your home, but you give up part of the business, its future profits and some control for good. Borrowing against property keeps full ownership but adds repayments and puts the property at risk if the plan fails. Equity tends to suit growth with uncertain timing; debt tends to suit specific needs with a clear way to repay.
Key points
- Investor money has no repayments and no mortgage, but costs ownership.
- Debt keeps ownership but needs a reliable way to repay.
- Uncertain timing of returns leans towards equity.
- Specific needs with a clear exit lean towards debt.
- Some owners combine a smaller loan with a smaller investment.
There are two fundamental ways to fund a business beyond its own cash: borrow money, or sell part of the business. A second mortgage is borrowing. Bringing in an investor is selling. They solve the same problem in opposite ways, and each has costs the other doesn’t.
How do debt and equity compare?
business.gov.au’s guide to choosing your funding sums up the core trade-off. Debt finance lets you retain full ownership but must be repaid with interest. Equity finance involves no debt repayments, but means giving up a portion of the business and its revenue.
Here’s how that plays out when the debt is secured on your property:
| Factor | Second mortgage | Investor |
|---|---|---|
| Ownership | You keep 100% | You give up a share, permanently |
| Repayments | Yes, plus the exit | None |
| Home at stake | Yes, if the home is security | No |
| Cost if the business does well | Loan costs only | A share of all future profits and sale value |
| Cost if the business struggles | Repayments still due | The investor shares the loss |
| Control | Unchanged | Shared, depending on terms |
| Timing | Can be planned around a deadline | Often slow and uncertain |
When does an investor make more sense?
- Returns are uncertain in timing. A new product, a new market or an expansion that may take years to pay off. Repayments against a timeline you can’t predict are risky.
- The amount is large relative to the property cushion. Borrowing it all would leave too little equity.
- You’d value what the investor brings beyond money: experience, contacts, customers.
- No one in the household wants the home involved. Equity keeps it clear.
When does a second mortgage make more sense?
- The need is specific and ends. Paying a tax debt, buying stock, funding a contract, completing a fit-out.
- There’s a clear way to repay. A sale, a refinance, or trading profits that already exist.
- The business is likely to grow in value. Giving away a share of something about to be worth more is expensive.
- There’s a firm deadline. Investor processes rarely run to a tax or settlement date.
If your need looks more like this second list, you can ask what’s realistic in a short enquiry, with no credit check at that stage.
Is there a middle path?
Often. A smaller loan and a smaller investment together can reduce the risk on both sides:
- A modest second mortgage handles the part with a clear repayment path.
- A smaller equity stake covers the part with uncertain timing.
The home carries less, and you give away less of the business.
Family members sometimes prefer to invest rather than guarantee. Taking a stake means they share in the upside, and their own home isn’t mortgaged for your business. It’s a structure worth discussing alongside the guarantor option.
What does it really cost to give up equity?
The cost of equity is easy to underestimate because there’s no invoice. Consider an illustrative business currently worth $1,000,000 that needs $250,000.
- Investor: takes 20% for $250,000. If the business is worth $2,000,000 in five years, that 20% is worth $400,000, plus a fifth of every year’s profits along the way.
- Second mortgage: $250,000 borrowed against property with a cushion, repaid within two years from a planned refinance. You keep 100% of the growth.
If the growth doesn’t happen, the picture flips: the investor shares the disappointment, and the loan still has to be repaid. That’s the whole decision in miniature. Illustrative only.
What should you check before taking on an investor?
- How much of the business they’re getting, and on what valuation.
- Voting rights, board seats and what decisions need their consent.
- What happens if you want to buy them out later, or they want to leave.
- Dilution if more investors come in.
- Legal and tax advice on the shareholder agreement.
business.gov.au’s guide to growing your business also suggests reviewing your business structure as you expand, which matters when new owners come in.
What if you’re buying a business or a partner out?
These are situations where the choice between equity and debt is sharp. Bringing in a new investor to fund a partner buyout can simply replace one co-owner with another. Borrowing to buy a business keeps ownership clean but relies on the business’s cash flow to repay.
How do you find the right kind of investor?
Investors vary. business.gov.au’s funding overview lists angel investors, venture capitalists and crowdfunding among the sources of equity finance. Industry partners, suppliers or customers sometimes invest for strategic reasons. Family and friends invest on trust. Each brings different expectations about returns, involvement, reporting and timing, and each suits a different kind of business.
Before approaching anyone, be clear about what you’re offering and what you’re not: how much of the business, what say they’ll have, what information they’ll receive, and how they might eventually get their money out. An investor who wants a quick sale and an owner who wants to build for twenty years will both be unhappy. Matching expectations upfront matters as much as agreeing the price.
Weigh debt and equity with someone neutral
If you’re torn between bringing someone in and borrowing against property, describe both in a short enquiry. One specialist will look at whether a second mortgage, a smaller loan alongside an investment, or neither, is the sensible route. There’s no credit check to ask, and your details aren’t distributed to a group of lenders. Please be accurate about the amount, the purpose and how and when you expect the money to pay its way.
Frequently asked questions
Is investor money cheaper than a loan?
Not necessarily. There are no repayments, but if the business does well, the investor's share of future profits and of any sale can be worth far more than loan costs. It's a different kind of cost.
Do I lose control if I take on an investor?
You give up some ownership and usually some say. How much depends on the size of the stake and the agreement, such as voting rights and board seats. Get legal advice on the terms.
Can family be investors instead of guarantors?
Yes. A family member taking a stake shares the upside and downside of the business without a mortgage over their home, which some families find more comfortable than a guarantee.
How long does it take to raise investor funds?
It varies widely and is often slow and uncertain. If you have a firm deadline, such as a tax debt or a settlement, an investor may not be realistic in the time available.