Capital Structure in Australia 2025: Debt vs Equity Strategies

In 2025, the capital structure conversation is anything but business as usual for Australian companies. With fresh regulatory tweaks, fluctuating interest rates, and a renewed focus on sustainable growth, the way businesses finance their ambitions has shifted. Whether you’re a CFO, a founder, or simply curious about what goes on behind the boardroom doors, understanding capital structure is crucial for making smart financial decisions in today’s landscape.

What is Capital Structure – and Why Does It Matter Now?

Capital structure is the blend of debt and equity a business uses to fund its operations and growth. In simple terms, it’s how a company decides to split the bill between borrowing (debt) and ownership investment (equity). This split has a direct impact on everything from a company’s risk profile and cost of capital to its ability to navigate market shocks.

In 2025, the context is different. With the RBA’s cash rate holding at 4.35% since late 2024, borrowing is costlier than it was just a few years ago. Meanwhile, recent changes to thin capitalisation rules, introduced in the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024, are forcing larger firms to rethink how much debt they can safely and tax-effectively carry.

• Debt: Loans, bonds, or other borrowings that must be repaid with interest.

• Equity: Funds from shareholders, including founders, private investors, or public markets.

2025: The Policy Landscape and Its Impact

This year, policy settings and market conditions are rewriting the capital structure playbook for many Australian companies. Here’s what’s shaping the conversation:

• Thin Capitalisation Reforms: The new rules, effective from July 2024, cap interest deductions to 30% of EBITDA for most entities. This limits the tax benefits of excessive debt, especially for multinationals and property trusts.

• Interest Rate Pressures: With the RBA keeping rates high to combat inflation, the cost of new loans has climbed. For example, a typical business loan now carries interest rates around 8–9%, compared to under 5% in 2021.

• Equity Market Dynamics: Australian public markets saw a resurgence in IPOs in early 2025, with tech and renewables leading the way. Startups are eyeing strategic equity raises to avoid high debt servicing costs.

• Green Finance Incentives: Government-backed schemes are making it cheaper for companies to raise ‘green’ debt or equity for sustainable projects, further influencing capital decisions.

How Australian Businesses Are Responding: Real-World Moves

Let’s bring it down to earth with some practical examples of how businesses are adjusting their capital structures in 2025:

• ASX-Listed Retailer: Facing tighter margins and higher loan costs, a major retailer refinanced its debt, stretching maturities and reducing leverage. It also raised $200 million via a rights issue to shore up its balance sheet ahead of expansion plans.

• Renewable Energy Startup: Instead of heavy bank borrowings, a solar energy startup tapped into the Clean Energy Finance Corporation’s new green bond facility, blending lower-cost debt with a fresh equity round from impact investors.

• Family-Owned Manufacturer: With thin capitalisation rules now biting, a mid-sized manufacturer shifted from debt-heavy financing to a hybrid model, bringing in a private equity partner to fund new equipment and R&D.

Optimising Your Capital Structure: 2025 Strategies

So, what should Australian businesses be thinking about as they plan their capital mix for the year ahead? Here are the key considerations:

• Stress-Test Scenarios: Model your cash flows under higher interest rates and stricter debt deductibility limits. Can your business weather a rate spike?

• Diversify Funding Sources: Don’t put all your eggs in the bank loan basket. Explore equity partners, government schemes, or even convertible notes.

• Align with Strategy: Fast-growth businesses may favour equity to avoid cash flow drag, while stable, cash-generating firms can still benefit from prudent debt.

• Factor in Non-Financial Goals: Access to green finance or ESG-aligned investors can give you a capital cost advantage—and a reputational boost.

The Bottom Line: Balance, Flexibility, and Foresight

In 2025, there’s no one-size-fits-all answer to capital structure. The right blend will depend on your business’s risk appetite, growth ambitions, and the new regulatory environment. What’s clear is that agility and a willingness to revisit old assumptions will be essential for staying competitive and resilient.