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Getting a loan to buy a 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. Here's what a loan to buy a business offers:
- 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
- You'll be required to submit an extensive business and financial plan
What type of finance is best for buying 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 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.
Unsecured business loans are riskier for the lender. This is why they have higher interest rates and you may not be able to borrow as much.
On the plus side, they may be faster to get approval for, provided you can demonstrate capacity to repay the loan.
Other options for financing a business purchase
There is always more than one way to finance your needs
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. There are several peer-to-peer lenders in Australia who facilitate loans for business purposes.
Buying out a business partner
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. This will involve a different type of application process.
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.
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, lenders will want to see that your business has been trading for at least six months and is in a strong financial position based on its revenue and balance sheet.
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 does the business own?
- 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 show:
1
Competitor analysis
Detailed analysis of the industry, market and competitors, plus the position of the existing business within the market.
2
Challenges
Any significant challenges or threats faced by the business, and detailed strategies for addressing them.
3
Financials
Clear and transparent figures relating to business turnover and cash flow, and how you plan to manage cash flow to maintain or improve profitability.
4
Your goals
Short, medium, and long-term business goals, including the timeframes for reaching each and how you plan to measure business performance.
5
Operational planning
How you plan to operate the business, to ensure you make the most of current resources and assets to remain competitive in your market.
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.
By doing this, you’re 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 these.
Here are the questions we generally suggest borrowers think about when assessing a business to buy:
Why is the vendor selling the business?
Ideally, the owner will be looking to retire or cash out of a healthy business to pursue other interests. If they are selling because they need to clear personal debt the needed to take on to fund the business, this could be a major red flag.
Is there a rush to sell the business?
There could very well be legitimate reasons a n owner wanting a speedy cash out, but you’ll want to make sure this isn’t a tactic to rush a sale to avoid scrutiny of the business accounts. If there is a legitimate reason for a rush to sell, you could leverage this when making an offer.
How are the business finances looking?
The three key financial statements used by businesses that you’ll want to understand are its balance sheet, profit and loss statements, and cash flow statement. If you're not confident navigating these, get the help of an accountant.
Is the business being sold in full or in part?
Will you have complete control and freedom in how you operate the business? If it's a part sale, it may be that the owner wants to continue receiving some benefit (incole) from the business, while relinquishing control of the daily operations.
What do the business’s employees and customers think?
Visit the business and speak to employees and 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?
Look at competitors, both locally and overseas, and see how the business compares. Assess the potential for growth. Even if you have experience with business finances and analysis, it’s a good idea to get independent expert advice.
Is buying an existing business a good idea?
Pros
- Start operating immediately
- Established customer base
- Existing systems, facilities, equipment
- Potentially less risky if you buy well compared to starting from scratch (survival rates among newly-established business are generally low)
Cons
- More expensive up-front cost
- Extensive due diligence required
- Not all the risks will be apparent before you take 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.
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