Should you give a creditor a share of your business instead of cash?

When cash is tight, equity can look tempting

A creditor offering to take shares instead of cash can sound like a clean fix. The debt goes down, the weekly squeeze eases, and the business may keep trading. But a share issue is not just a payment method. It changes ownership, and ownership can change who has a say in the company.

ASIC says a share is part ownership of a company, and shareholder rights can depend on the class of shares and the company documents. That means the real question is not only whether the debt falls. It is also who gains voting power, dividend rights and future influence once the new shares are issued.

Get a current value before you trade anything

Before you talk percentages, get the business valued. Business.gov.au says business valuation relies on current financial information, assets and liabilities, and that buyers or investors may want an independent view. That matters because a weak cash position can make the company feel cheaper than it really is, or more expensive than the risk warrants.

A valuation gives you something practical to test the offer against. If the debt is large but the business still has strong margins, equipment or contract value, you may be giving away too much equity for too little relief. If the business is already fragile, you still need a grounded number so the creditor is not using pressure to buy in cheaply.

Source: Official guidance

Check the papers that control ownership

Next, read the constitution and any shareholder agreement. ASIC says shareholder rights may be set out in those documents, and the Corporations Act says different share classes can carry different rights and restrictions. In plain terms, the label on the share is not enough. The rights attached to it decide how much control actually moves.

The Act also says a shareholder may sell shares only if the sale would not breach the constitution, and directors can have discretion to refuse registration of a transfer. That is why a debt-for-equity deal should never be treated as a handshake arrangement. It has to fit the company rules, or the deal may fail later, after pressure has already done its damage.

Negotiate the control points, not just the discount

If the creditor wants equity, negotiate what comes with it. Ask whether the shares will be ordinary or a different class, whether there are voting rights, board rights, veto rights or information rights, and whether the creditor can sell on later. ASIC says voting rights are tied to share class, so those details are not side issues.

You should also agree the debt amount being converted, the valuation date, what releases the creditor gives up, and whether any future funding will dilute them further. If those points stay vague, the company can end up with a new owner who has influence but no real skin in the game, or with a dispute that starts after the debt has already been forgiven.

Document it properly, then take the next step

Once terms are settled, paper the deal properly. ASIC says companies must keep share and member details on their register, and the records need to stay current. Put the valuation, issue documents, approvals, share register update and any release of the old debt into one file. That file becomes the proof of what was actually agreed.

If you are weighing up whether the swap helps or quietly gives away control, bring the valuation, shareholder documents and draft terms to CRP today about debt restructuring. CRP coordinates independent qualified professionals who can help you test the commercial position and work out the next move. This article is general information only and not legal advice.