Debt Financing Explained for Australian Startups
Synopsis
Debt financing can help Australian startups raise capital without giving up ownership, but it comes with repayment obligations and other trade-offs. This guide explains the main startup debt options, including traditional loans, unsecured financing, revenue-based financing and venture debt, along with eligibility, costs, dilution and when debt may make sense.
The appeal of debt financing is obvious: you borrow money, you pay it back, and nobody takes a slice of your company. For founders who've spent time thinking about dilution and cap table management, debt sounds like the cleaner option.
The reality is more complicated. Most early-stage startups can't access traditional debt at all, and the forms of debt that are available to startups come with trade-offs that aren't always obvious upfront. Here's an honest look at what's actually available, when it makes sense, and when it doesn't.
What Debt Financing Actually Is
Debt financing means borrowing money with an obligation to repay it, usually with interest, over an agreed period. Unlike equity, no ownership changes hands. The lender has no stake in the upside if the business becomes valuable they just want their principal back plus the agreed return.
That structure creates a fundamental difference in risk allocation. With equity, investors share the downside if the business fails, they lose their investment alongside you. With debt, the obligation to repay exists regardless of how the business performs. If revenue drops, if a product launch fails, if a key customer churns the repayment schedule doesn't pause.
That's why debt suits businesses with predictable, recurring revenue far better than it suits early-stage startups burning cash to find product-market fit.
Can an Early-Stage Startup Even Get Debt?
Honestly, probably not from a traditional lender. Banks and mainstream business lenders typically want two to three years of trading history, demonstrated revenue and assets to secure against. A pre-revenue startup has none of these things, which is why equity dominates at the earliest stages; it's often the only capital available.
But "startup debt" isn't one thing. Several different structures exist, and they suit different stages.
The Main Forms of Startup Debt in Australia
Traditional business loans are the most familiar but the least accessible for early-stage companies. Banks will lend against assets or trading history. If you have neither, you won't qualify. Once a startup has 12–24 months of revenue and some business assets, traditional lending becomes more viable but by then, most founders are already thinking about equity rounds anyway.
Unsecured business loans from non-bank lenders are often more accessible than bank loans, but they can be more expensive. Eligibility varies by lender. Prospa currently lists at least six months of trading history and minimum monthly turnover of A$6,000, while Moula lists at least 12 months in business and A$10,000 in monthly sales. OnDeck’s eligibility criteria may differ, so founders should check its current requirements directly before applying.
Interest rates and fees vary significantly by lender, product and borrower profile. Moula currently publishes APRs of 15.99% to 35.99%, while Prospa’s published rates vary according to factors such as the business’s industry, time in operation, cash flow and creditworthiness.
Merchant cash advances and other revenue-linked products may use a factor rate or fixed fee instead of a conventional annual interest rate, so compare the total repayment amount and effective cost rather than relying on the headline rate alone. These products are generally better suited to cash-flow gaps and defined short-term needs than to long-term growth capital.
Revenue-based financing has become more visible in Australia over the past few years. It generally allows a business to receive capital and repay the provider through a percentage of its revenue or another revenue-linked repayment structure until an agreed repayment amount or cap is reached. The company does not give up equity, and repayments may vary with revenue, although the exact structure differs by provider. Some facilities use a monthly revenue share, while others may use a fixed fee or capped repayment schedule.
Revenue-based financing is generally better suited to businesses with established and reasonably predictable revenue, including some SaaS, subscription and e-commerce companies. Eligibility requirements, revenue thresholds, repayment percentages and total repayment amounts vary significantly by provider and product, so founders should review the current terms rather than assume that a particular MRR threshold or repayment multiple applies across the market. It is typically considered by companies seeking non-dilutive growth capital, bridge funding or a complement to equity, rather than by pre-revenue startups
Venture debt is a specific form of debt designed for startups that have already raised institutional equity. It's typically offered by specialist lenders in Australia, including players like Partners for Growth, alongside a range of overseas providers operating locally alongside or shortly after a VC round. The lender uses the startup's raised equity as a confidence signal rather than requiring traditional assets as security.
Venture debt is often structured as a term loan and may include warrants, which give the lender the right to buy a small amount of equity at a fixed price. Warrants can compensate the lender for the higher risk of lending to a startup, although the terms vary significantly between lenders and transactions. Interest rates are generally higher than traditional debt, but the potential dilution is usually much smaller than raising a full equity round.
The typical use case is extending the runway between equity rounds. A startup that has raised a Series A and wants to push further toward its Series B metrics without raising another equity round at a potentially lower valuation may use venture debt to potentially extend its runway between equity rounds.
Does Debt Dilute Founders?
Standard debt loans, revenue-based financing don't dilute founders at all. That's the main appeal.
Venture debt technically creates some potential dilution through the warrant component, but the amount depends on the lender, transaction and negotiated terms. The potential dilution is usually much smaller than raising a full equity round, although founders should model the warrants alongside interest, fees and repayment obligations before accepting the facility.
Convertible notes sit in a grey area. They're structured as debt. Initially the company borrows money and owes it back but they convert into equity at a future funding round. Convertible notes are commonly used for bridge rounds and early-stage raises in Australia, particularly when valuation is difficult to agree on. They look like debt on paper but behave like equity when conversion triggers.
When Debt Makes Sense for a Startup
Debt works best when two conditions are met: the business has revenue it can service repayments from, and the cost of debt is lower than the cost of issuing equity at the current valuation.
A startup generating $100,000 in monthly recurring revenue considering a $500,000 raise has a genuine choice. Raising equity at a $5 million valuation costs 10% of the company permanently. Revenue-based financing at 1.5x repayment costs $750,000 over time but costs nothing in ownership. If that $500,000 is enough to reach the next milestone, the debt option preserves significantly more value for founders and existing shareholders.
The calculus changes if the capital requirement is large, if revenue is unpredictable, or if the business needs a strategic investor alongside the capital. For pre-revenue companies, debt isn't really a choice, equity is the only option. But once revenue exists, building a financing strategy that deliberately combines equity and non-dilutive debt tends to produce better long-term outcomes than relying on equity alone.
FAQs
Can a startup with no revenue get debt financing?
In most cases, no. Traditional lenders, non-bank lenders and revenue-based financing providers all require demonstrated revenue. The exception is venture debt, which requires prior institutional equity rather than revenue but even venture debt isn't available to the earliest-stage companies.
What is venture debt and who offers it in Australia?
Venture debt is a loan structured specifically for venture-backed startups, typically offered alongside or after an institutional equity round. It uses the startup's raised equity as a confidence signal rather than requiring traditional assets as security. Specialist lenders offer it in Australia, sometimes alongside terms that include small equity warrants.
Does taking on debt affect my ability to raise equity later?
It can. Debt sits on the balance sheet as a liability, which investors will see during due diligence. Well-structured debt used for a clear purpose extending runway to a specific milestone is generally viewed as disciplined capital management. Messy or excessive debt without a clear rationale creates more concern.
What's the difference between secured and unsecured startup debt?
Secured debt requires assets as collateral; the lender can seize those assets if you default. Unsecured debt has no collateral requirement but typically carries higher interest rates to compensate for the lender's additional risk. Most startup-specific lending products are unsecured given startups often have limited physical assets.
This article contains general information only and does not constitute financial or legal advice. Founders should seek independent advice before entering any debt financing arrangement.
At Inspirepreneurs Magazine, covering entrepreneurship, business failures, and the human stories behind the world's most ambitious founders. She writes at the intersection of strategy and storytelling.
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