Finding the right funding can be one of the biggest turning points in your startup or small business journey. The good news is that there are plenty of ways to approach financing your business in Australia - from bootstrapping and bank loans to bringing in investors or using more flexible funding options.
But here’s the part many founders only realise after they’ve started negotiating: funding is never just about the money. It’s also about control, risk, repayment, security interests, legal duties, and how decisions get made once someone else has a stake in your business.
If you’re financing your business operations (or gearing up to), a clear legal checklist helps you move faster, negotiate with more confidence, and avoid avoidable disputes later. Below, we’ll walk you through the key legal steps Australian startups and SMEs should consider when raising funds.
What Does “Financing Your Business” Mean (And Why The Legal Side Matters)?
In simple terms, financing your business means getting the capital your business needs to start, operate, or grow - whether that money comes from you, a lender, or an investor.
The legal side matters because funding almost always creates:
- Repayment obligations (for example, with loans or vendor finance)
- Ownership changes (for example, issuing shares to investors)
- Control and decision-making rights (for example, veto rights or board appointment rights)
- Security and enforcement rights (for example, a lender taking security over business assets)
Even where the funding is “friendly” - like from family, friends, or a co-founder - you still want the terms written down. When expectations aren’t clear, disputes tend to appear at the worst possible time (usually when the business is under pressure).
Step 1: Get Your Structure And Ownership House In Order Before You Raise Funds
Before you sign anything, you’ll want to confirm the basics of who owns what and who has authority to make decisions. This sounds obvious, but in early-stage businesses it’s often messy - and investors and lenders will usually ask for clarity anyway.
Choose The Right Business Structure
Your business structure affects your risk profile, tax position, and ability to raise money. In Australia, common structures include:
- Sole trader: Simple to start, but you are personally responsible for debts.
- Partnership: Shared ownership and responsibility, but partners can be exposed to liabilities depending on how it’s set up.
- Company: Often preferred for growth because it’s a separate legal entity (and generally offers limited liability for shareholders).
If you’re aiming for outside investment (especially equity investment), operating through a company is very common because shares can be issued and transferred more cleanly.
It’s also worth making sure your internal governance documents are in place early, like a Company Constitution, so everyone understands how decisions get made and what approvals are required.
Document Co-Founder And Investor Relationships
If you have multiple founders (or you’re about to bring in an investor), you should think about how ownership and control will work in practice. A properly drafted Shareholders Agreement can set clear rules around:
- who owns which shares (and whether any are vesting over time)
- how key decisions get approved
- what happens if someone wants to leave
- what happens if you want to raise more capital later
- deadlock processes (when decision-makers can’t agree)
If you’re financing business growth through equity, this is one of the documents that can save a huge amount of stress later.
Step 2: Match The Funding Type To Your Risk (Loans vs Equity vs Hybrids)
There’s no single “best” way to fund a business. The right option depends on your cash flow, appetite for dilution, and how quickly you need capital.
From a legal perspective, the key is making sure the funding method you choose is properly documented and aligned with your commercial reality.
Debt Funding (Loans And Credit)
Debt funding generally means you must repay the amount borrowed (usually with interest), regardless of whether the business is profitable. Common examples include bank loans, private loans, lines of credit, or short-term funding arrangements.
When you’re financing your business via debt, key legal issues to check include:
- Repayment terms: How and when repayments are made (and what happens if you miss one).
- Default provisions: When the lender can call the loan in.
- Personal guarantees: Whether you’re personally on the hook if the business can’t pay.
- Security: Whether the lender has rights over business assets.
Equity Funding (Issuing Shares To Investors)
Equity funding means investors provide money in exchange for shares (ownership) in your company. This can be great for cash flow because there may be no fixed repayments - but it often comes with governance rights and dilution of founder control.
When financing your business via equity, you’ll want to document things like:
- how much is being invested and what valuation is being used
- what class of shares is being issued (ordinary vs preference, etc.)
- shareholder rights (dividends, voting, exit rights)
- information rights (what financials and reports you must provide)
Hybrid Funding (Convertible Notes And Similar Options)
Some businesses use hybrid structures that start as debt and can convert into equity later (often used when valuation is still being worked out). These arrangements can be effective, but they need to be drafted carefully because “small” terms (like discounts, caps, and conversion triggers) can have big long-term consequences.
Step 3: Put The Right Funding Documents In Place (Before Money Moves)
Whether you’re dealing with an investor, a lender, or a strategic partner, strong documentation is what turns a conversation into a clear, enforceable deal.
Heads Of Agreement Or Term Sheet
Many funding deals start with a term sheet (or heads of agreement). This document is usually designed to capture the key commercial points before the parties invest time and money into full documents.
Be careful: even if you call it “non-binding”, some clauses may still be intended to be binding (like confidentiality, exclusivity, or costs). It’s worth getting this reviewed before you rely on it.
Loan Agreement (If You’re Borrowing)
A loan agreement typically covers:
- loan amount and drawdown conditions
- interest, fees, and repayment schedule
- events of default
- representations and warranties
- security and guarantees (if any)
Where security is involved, the structure and wording should line up with what is actually registered and enforceable (more on that below).
Share Subscription Or Share Sale Documents (If You’re Issuing Shares)
If an investor is coming in for equity, you’ll usually need documents that set out:
- the number and type of shares being issued
- the price and payment mechanics
- conditions precedent (things that must happen before completion)
- updated shareholder arrangements and governance documents
It’s common to pair these with a Shareholders Agreement so the relationship is clear after the investment.
Side Documents You Might Not Expect
Depending on the deal, you may also need:
- Confidentiality agreements (especially if you’re sharing financials, pricing, or product plans)
- IP assignment or licence terms (so the company clearly owns or can use key IP)
- Employment and contractor agreements (so investors know your team is properly engaged and IP is protected)
If you’re already hiring (or planning to), it’s worth checking you have compliant Employment Contract templates in place so your people and IP arrangements don’t become a due diligence issue.
Step 4: Understand Security Interests, PPSR, And Personal Guarantees
When you’re financing your business through loans or trade credit, lenders and suppliers often want “security”. In practice, that usually means they want legal rights over certain assets if you don’t pay.
What Is A Security Interest (In Plain English)?
A security interest is a legal interest in personal property that helps secure payment or performance of an obligation. “Personal property” is a broad category that can include things like equipment, inventory, vehicles, receivables, and even some IP rights.
Many lenders use a general security agreement to take security over a broad pool of assets.
Why PPSR Registration Matters
In Australia, security interests are commonly registered on the Personal Property Securities Register (PPSR). Registration can affect priority - in other words, who gets paid first if things go wrong.
If you’re giving security to a lender, you’ll want to ensure:
- the security is correctly described and legally effective
- registrations are accurate (errors can cause major enforceability issues)
- you understand what assets are “tied up” and how that impacts future funding
If you’re on the other side (for example, you’re supplying goods on credit), it’s also worth considering whether you should register a security interest to protect your position.
Personal Guarantees (A Common Hidden Risk)
Founders are often asked to sign personal guarantees - particularly in early stages when the business has limited assets or trading history.
A personal guarantee can mean that if your company can’t pay, the lender can pursue you personally. Before you agree, make sure you understand:
- the scope (is it limited or unlimited?)
- when the guarantee can be enforced
- whether other security exists (and where you sit in priority)
This is one of those “small paragraph, big consequences” parts of financing business deals, so it’s worth slowing down and getting advice.
Step 5: Don’t Forget Ongoing Compliance (Director Duties, Consumer Law, Privacy)
Funding can accelerate growth - but it can also raise the compliance stakes. As you scale, your legal risk profile changes, and investors often expect stronger governance and compliance hygiene.
Director Duties And Solvency
If you operate through a company, directors have legal duties, including obligations around acting in the best interests of the company and avoiding insolvent trading.
When you’re financing business operations with debt, you should also keep an eye on cash flow and solvency, because repayment obligations don’t wait for “next quarter”.
Australian Consumer Law (ACL) And Sales Practices
If you sell products or services to customers, you’ll need to comply with the Australian Consumer Law (ACL). This affects things like:
- refunds and returns
- marketing claims (avoiding misleading or deceptive conduct)
- warranties and consumer guarantees
Funding can help you scale your marketing fast - but scaling fast also means mistakes can multiply quickly, so it’s worth putting the right terms and processes in place early.
Privacy And Data: Investors Will Ask About It
If you collect personal information (for example, customer emails, delivery addresses, analytics identifiers, or employee records), investors may ask how you handle that data. Depending on your business, you may be legally required to comply with the Privacy Act 1988 (Cth) and have a clear Privacy Policy that reflects what you actually do with that data.
Keep in mind that some smaller businesses may be exempt from parts of the Privacy Act (for example, where they meet the small business exemption), but privacy obligations can still apply in specific situations - and in any case it’s commonly a due diligence question when you’re raising capital, especially if your business is technology-enabled or runs online.
Key Takeaways
- Financing business growth is not just a commercial decision - it’s a legal decision that affects ownership, repayment obligations, and control.
- Before raising funds, get your structure, cap table, and internal governance clear (including key documents like a Company Constitution and Shareholders Agreement).
- Match the funding type to your business reality: debt creates repayment pressure, equity creates dilution and governance obligations, and hybrids need careful drafting.
- Put clear funding documents in place before money moves - and watch out for “hidden” risks like personal guarantees and broad default clauses.
- If security is involved, understand PPSR registrations and how a security interest impacts your ability to raise future funding.
- As you grow, compliance matters more - particularly director duties, Australian Consumer Law obligations, and privacy/data practices.
This article provides general legal information only and is not legal, tax or financial advice. If you’d like advice specific to your business and funding plans, it’s best to speak with a lawyer (and your accountant or financial adviser where relevant).
If you’d like a consultation on financing business growth for your startup or SME, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
