Loans for Buying a Business

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Getting a loan to buy an established business in Australia

If you’re planning to get into business or expand, buying an existing business has a lot of advantages. Not least the reduced risk.

Only about half of new Australian businesses survive beyond three years of operating. In other words, it’s a coin flip.

Buying an established business is a very different proposition.

One possible barrier is cost. If you’re buying an existing business with assets, customers, cash flow and an established brand, you’ll be paying for that.

It’s why finance is usually required.

I’ve started several of my own businesses. And I’ve helped countless others source the finance they need to expand.

Here’s my guide to getting a loan to buy an established business.

How business purchase loans works

  • Access funds to buy an existing business
  • Borrow up to $1million
  • Loan terms up to 5 years
  • Loans can be secured or unsecured
  • Fixed and variable rate finance available
  • Extensive business plan and financial information required

What type of finance is best for buying a business?

Depending on the situation, there are a few different finance options for buying a business.

secured loan to buy a business

Secured loans for buying a business

A secured business loan is likely to be the most cost-effective option for financing the purchase of an existing business.

To apply for a secured business loan, you’ll need an asset to use as collateral. This could be a personal asset, such as your home, or an asset from a business you already own.

It may also be possible to get a loan secured against the business you are buying if it meets the lender’s criteria.

unsecured loan to buy a business

Unsecured loans for buying a business

You could also consider an unsecured business loan to finance the business purchase. You won’t need an asset to secure the loan and the funds can be used with fewer restrictions compared to secured finance.

Unsecured business loans are riskier for the lender. This is why they have higher rates of interest than secured loans and you may not be able to borrow as much.

On the plus side, they are usually easier and faster to get approval for, provided you can demonstrate capacity to repay the loan.

Other options for financing a business purchase

Invoice finance: If the business you’re purchasing is owed money by customers, you may be able to borrow against the value of the outstanding invoices to finance part of the business purchase. This is called invoice finance.

Vendor finance: With vendor finance, you only pay part of the sale price up front and then pay the rest to the seller (plus interest) in instalments. Essentially the seller is financing part of the sale.

Peer-to-peer finance: This is similar to business finance provided by a bank, but the funds are provided by investors looking for a return on their money, as opposed to a financial institution lending for profit. There are several peer-to-peer lenders in Australia who facilitate loans for business purposes.

There are also finance options available if instead of buying a separate business you are buying out a partner of a business you currently co-own.

qualify for a loan to buy a business

How to qualify for a loan to buy a business

You can apply for finance to purchase an existing business from a bank, credit union, online lender or peer-to-peer lender. The eligibility criteria will depend which one you choose and the specific provider.

Whatever avenue you take, the lender will assess your eligibility based on information about you and your current business (if you are already a business owner), and the business you’re buying.

Be prepared, the lender will likely have a lot of questions.

Information about you and your existing business

The lender will ask you to demonstrate that:

  • You are an Australian citizen or permanent resident
  • You have the necessary qualifications and experience to run the business you intend to purchase successfully
  • You do not have any issues in your credit history (if you do, some lenders offer bad credit business loans)
  • Your personal income, assets and liabilities demonstrate your capacity to borrow (there are low doc business loans available for borrowers who cannot provide standard documents as proof)
  • The lender may also want to know how much of your own money you are investing into the business

If you’re a business owner already:

  • Your business has been in operation for at least six months
  • Your business has sufficient regular revenue
  • Your business is in a strong financial position based on its balance sheet
Business financials

Information about the business you’re buying

Expect a lender to ask for the following information about the business you plan to buy:

  • How is the business structured?
  • Where is it located?
  • How long has it been in business and in what industry?
  • What is the turnover and profit of the business?
  • How healthy is its current cash flow?
  • What assets are owned by the business?
  • What current debts does it have?

As well as this, the lender will almost certainly ask to see a detailed business plan showing forecasts for revenue, cash flow and other key indicators for the first two years of operations.

What will your business plan need to show?

The business plan for the business you intend to buy will be crucial to getting your finance approved. Ideally it should shiw

  • Detailed analysis of the industry, market and competitors relevant to the business you’re buying.
  • The position of the existing business within the market and its future.
  • Any significant challenges faced by the business, and detailed strategies for addressing them.
  • Clear and transparent figures relating to business turnover and cash flow, and how you plan to manage cash flow to maintain or improve profitability.
  • Short, medium, and long-term business goals, including the timeframes for reaching each and how you plan to measure business performance.
  • How you plan to operate the business, to ensure you make the most of current resources and assets to remain competitive in your market.
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How to assess a business that’s up for sale

Once you’ve found an existing business you are interested in purchasing, the first thing you’ll need to do is ask questions. A lot of them.

You’re essentially arming yourself with the information your lender will ask of you when the time comes to apply for finance.

Even an attractive looking business on paper will likely have its issues. It’s better that you — and not a potential lender — discover any concerns. And it’s certainly better that you discover them before the sale is finalised.

Here are the questions I generally suggest borrowers think when assessing a business to buy:

why is the vendor selling the business

Why is the vendor selling the business?

Ideally, the owner will either be looking to retire or cash out of a successful business to pursue other interests. If the owner is selling because they need to clear debt, which kind of debt is it?

Is it a debt taken out by the business, or personal debt? If the owner has taken on personal debt to fund the business, this could be a major red flag.

Is there a rush to sell the business, and why?

Is the owner looking to make a quick sale? There could very well be legitimate reasons for wanting to cash out — such as moving overseas, or a limited-time opportunity to start another business — but you’ll want to make sure this isn’t a tactic to rush a sale to avoid scrutiny of the business accounts.

On the plus side, if there is a legitimate reason for the rush to sell, you could leverage this when making an offer.

Documents you'll need to apply for a home loan - proof of debt

How are the business finances looking?

There are three key financial statements used by businesses that you’ll want to understand:

  • Balance sheet — a current view of business finances based on assets and liabilities.
  • Profit and loss statement — business performance over a period of time.
  • Cash flow statement — income and expenditure, this will show money coming in and out, and will help identify issues with the business that may be preventing growth.

Is the business being sold in full or in part?

This is an important consideration if you’re purchasing the business to gain complete control and freedom in how you operate it. In the case of a part sale, it’s more likely that the business owner wants to continue receiving some benefit from the business in the form of stable income, while relinquishing control of the daily operations.

What do the business’s employees and customers think?

Visit the business and speak to customers. Ask them what they like and dislike about the business, or if there have been any changes in how the business operates recently.

What are the market conditions?

Ideally, you’ll want to purchase an existing, established business in an industry where it can continue to be competitive. Look at competitors, both locally and overseas, and see how the business compares. Assess the potential for growth in the market.

Even if you have experience with business finances and analysis, it’s a good idea to engage external experts for independent advice. You may wish to speak to accountants, auditors, financial analysts, business analysts, and forensic accountants.

Frequently asked questions about getting finance to buy an existing business:

Yes, it’s possible to get a business loan to buy an existing business. You will need to first meet lender criteria for loan approval, and fully understand the amount you need to borrow to finance the purchase and continued operation of the business under your ownership.

Small business lenders will generally lend anything up to $750,000 to borrowers looking to finance the purchase of a business. But the actual amount will depend on the business being bought, the financial position of the borrower and whether the loan is secured or not.

There are no hard and fast rules for this but generally lenders like to see that the person or business looking for finance is investing some of their own capital.

There are benefits to buying an existing business over starting your own. You may be able to acquire a business that already has established processes and regular income streams. You could also benefit if the existing staff will stay on following the change of ownership.

The cost to buy a business will vary depending on the seller’s asking price for the business, your valuation of it based on your assessment, and how well you can negotiate the price. Of course, there will be many other costs on top of the actual sale price, including fee for legal advice, expert financial and accounting advice, and stamp (transfer) duty.

There are some obvious advantages to purchasing a business that is already established but there are potential disadvantages to consider too:

Pros of buying an existing business

  • Don’t need to set up a business from scratch (survival rates among newly-established business are generally low)
  • Start operating immediately
  • Established customer base
  • Existing systems, facilities, equipment

Cons of buying an existing business

  • More expensive up-front cost
  • Extensive due diligence required
  • You are purchasing the business’s bad points as well as its good ones, and not all the negatives will be apparent before you taker over
  • Existing businesses can be difficult to value as some intangible factors (like the brand, reputation and customer loyalty) can be almost impossible to objectively assess.

Business Loan guides and resources

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Written by

Shaun McGowan founder

Loans Expert

Shaun McGowan

Reviewed by

Sean Callery Editor


Sean Callery