Every growing business reaches the point where its own cash flow is no longer enough. A new branch, a large contract, new equipment or an acquisition needs capital, and the owners have to decide where it comes from. In broad terms there are two options: borrow it (debt) or sell part of the business for it (equity).
The choice is not only financial. Debt and equity create very different legal relationships, with different consequences for control, personal risk, tax and your ability to raise money again later. In 2026 the decision has also become more expensive to get wrong. The South African Reserve Bank raised the repo rate in May and again on 23 September 2026, taking it to 7.25% and the prime lending rate to 10.75%. Floating-rate debt now costs more than it did at the start of the year.
This article explains the main legal differences, so that you can have a better-informed conversation with your accountant, your funders and your co-owners.
Debt funding: borrowing against the business
Debt funding includes bank overdrafts and term loans, asset finance, invoice discounting, loans from shareholders or family, and private credit funds. Its defining feature is that the money must be repaid, usually with interest, whether or not the business performs.
What debt costs you
- Interest and fees. Bank loans are often linked to prime, so rate hikes flow straight through to your repayments.
- Security. Lenders usually want security: a mortgage bond over property, a general or special notarial bond over movables, a cession of debtors or a pledge of shares.
- Personal suretyships. Banks routinely ask directors and shareholders to sign as sureties. This removes much of the protection that a company structure gives you. If the company defaults, the bank can claim from you personally.
- Covenants. Loan agreements often restrict dividends, further borrowing, disposals of assets and changes of control, and require you to meet financial ratios. Breaching a covenant can make the whole loan immediately due.
What debt protects
The big advantage of debt is that you keep your shareholding and control. Once the loan is repaid, the lender has no further claim on the business or its growth. Interest is also generally deductible for income tax purposes where the funds are used in the production of income, although the Income Tax Act 58 of 1962 limits interest deductions in some cases, for example on certain debts owed to connected persons who are not subject to South African tax (section 23M).
Many business loans fall outside the National Credit Act 34 of 2005. The Act does not apply to credit agreements where the borrower is a juristic person whose asset value or annual turnover is at or above the threshold set by the Minister (currently R1 million). This means that most companies borrowing from banks do not enjoy the consumer protections in the Act, so the terms of the loan agreement matter even more.
Equity funding: selling part of the business
Equity funding means issuing new shares to an investor in exchange for capital. The investor might be an angel, a venture capital fund, a private equity fund, a strategic partner or an employee. Instruments such as convertible loans and SAFEs sit in between, starting as a claim and converting into shares later.
What equity costs you
- Dilution. Your percentage shareholding falls, and so does your share of future dividends and sale proceeds.
- Control. Investors usually want board seats, information rights and veto rights over key decisions, such as new share issues, budgets, acquisitions and the sale of the business.
- Preferences. Professional investors often take preference shares with a liquidation preference, so they are repaid before ordinary shareholders on an exit.
- Exit expectations. Funds need to return capital to their own investors, usually within a set period. Taking their money commits you to a path towards a sale or listing.
What equity protects
Equity does not have to be repaid and carries no interest. If the business struggles, the investor shares the loss. There is usually no personal suretyship. A good investor may also bring expertise, networks and credibility with later funders. Dividends are not deductible for the company, and dividends tax generally applies when they are paid, so equity is not “free” from a tax perspective either.
The Companies Act rules that apply to both
The Companies Act 71 of 2008 contains several rules that affect any funding round:
- Authority to issue shares (sections 36 and 38). The board may issue shares only within the classes and numbers authorised by the memorandum of incorporation (MOI). New classes or more shares may require an MOI amendment by special resolution.
- Pre-emptive rights (section 39). In a private company, existing shareholders generally have a right to take up new shares in proportion to their holdings, unless the MOI provides otherwise.
- Shareholder approval (section 41). Issues to directors and related persons, and issues that carry 30% or more of the voting power, generally need a special resolution.
- Financial assistance (sections 44 and 45). If the company lends to, guarantees or secures obligations of related companies, directors or share subscribers, board approval, shareholder authority and the solvency and liquidity test usually apply.
- Distributions (section 46). Dividends and share buy-backs require the board to apply the solvency and liquidity test. Lenders often restrict distributions further by contract.
Getting these steps wrong can make a share issue or guarantee open to challenge, and investors’ lawyers will check them in due diligence.
How to decide
There is no universally correct answer, but some patterns hold:
- Debt usually suits businesses with predictable cash flow and assets to offer as security, where the funding is for something that will generate a return quickly enough to service the loan.
- Equity usually suits businesses with high growth potential but uncertain cash flow, such as early-stage technology companies, where loan repayments would starve the business of working capital.
- Many businesses use a mix: equity to fund growth and risk, and debt for working capital or assets. Hybrid instruments, such as convertible loans, redeemable preference shares and shareholder loans, can bridge the two.
A practical checklist before you raise
- Get your financial statements, management accounts and forecasts up to date, so that you know how much you need and what you can service.
- Review your MOI and any shareholders’ agreement for pre-emptive rights, approval requirements and restrictions on borrowing.
- List existing loan covenants, securities and suretyships, and check whether new funding would breach them.
- Model the effect on your shareholding (for equity) and your cash flow at higher interest rates (for debt).
- Ask your tax adviser about interest deductibility, dividends tax and any exchange control approvals if the funder is offshore.
- Negotiate the term sheet or loan offer with legal input before signing anything, even if it is described as non-binding.
- Make sure board and shareholder resolutions are properly passed and filed before the money flows.
How O’Reilly Law can help
We advise companies and founders on debt and equity funding, from shareholder loans and bank facilities to angel, venture capital and private equity rounds. We review and negotiate term sheets and loan agreements, draft subscription and shareholders’ agreements, update MOIs, and prepare the resolutions the Companies Act requires. We work alongside your accountant and tax adviser so that the legal structure matches the commercial and tax objectives.
Contact us to discuss your funding options before you sign a term sheet or loan offer.
Related reading: What is the deal with preference shares? Liquidation and dividend preference · SAFE agreements explained
This article is general information and not legal, tax or financial advice. Correct as at October 2026.