Key takeaways
- Most business purchases are funded by a mix of your own money and borrowed money.
- Lenders generally look at the business's cash flow, your experience, the security on offer and your own contribution.
- Goodwill is harder to borrow against than property or equipment.
- This is general information only. Every lender is different and nothing here is a promise of approval.
Let’s get the boring but important bit out of the way first. This is general information only. It’s not credit advice, it doesn’t take your circumstances into account, and nothing here is a promise that anyone will lend you a cent. Every lender has its own rules and they change. Talk to a licensed credit professional before you make any decisions.
Right. With that said, here’s how business purchases are commonly funded, so you can walk into those conversations knowing the lay of the land.
Most deals are a mix
Very few people buy a business with a suitcase of cash. Most purchases are funded with some combination of:
- Your own money (savings, or proceeds from selling something)
- Borrowing secured against property you already own
- A business loan secured against the business and its assets
- Equipment or asset finance for vehicles, plant and machinery
- Vendor finance, where the seller gets paid part of the price later
The mix depends on the business, the price, you, and the lender.
What lenders generally look at
Different lenders weigh things differently, but most will want to understand a few things.
1. Can the business pay for itself? This is the big one. They’ll look at the business’s historical profit and ask whether it can pay the new owner a living, pay the loan repayments, and still leave a buffer for a bad month. That’s why clean, believable financials matter so much. More on that in how to value a small business.
2. What security is there? Lenders like things they can sell if it all goes pear-shaped. Property is generally the easiest. Equipment and vehicles come next. Goodwill, the value of the business’s reputation and customer base, is the hardest to secure against, because if the business fails, the goodwill tends to vanish with it.
3. How much are you putting in? Skin in the game. Buyers often find they need a bigger contribution of their own than for a home loan. The exact amount varies a lot.
4. Do you know what you’re doing? Experience in the industry, or in running a business, or a franchise system with training behind it, can all help your case.
Why business plus freehold can look different
If the business comes with its property, the freehold part is generally easier to secure against than goodwill. The total price is higher, though, so you’re borrowing more overall. Have a read of business plus freehold explained and check out our business and freehold listings.
Equipment finance
For businesses heavy in plant, think workshops, cabinet makers and cleaning businesses with vans, some of the purchase price may relate to equipment that can be financed separately. That can take a bit of pressure off the main borrowing. Talk to a credit professional about whether it suits.
Vendor finance: worth asking about
Sometimes the seller agrees to take part of the price later. Say $400k at settlement and $100k over two years. It’s not common in small business sales, but when it happens it can:
- Bridge a gap between what you’ve got and the price
- Show the vendor believes the business will keep performing
It needs a proper legal agreement, security arrangements and clear terms on what happens if things go wrong. Never do it on a handshake.
Franchise systems
Some franchise systems have established relationships with particular lenders who know the brand and its numbers. That doesn’t guarantee anything, but it can make the conversation easier. More in buying a franchise resale.
Get your ducks in a row first
Before you start talking to lenders, it helps to have:
- The business’s financials and the Information Memorandum (see what’s in an IM)
- Your own financial position: assets, debts, income, a recent tax return
- A short plan for the business: what you’ll keep, what you’ll fix, how you’ll grow it
- Your experience, written down plainly
- A realistic budget for the extras: stock, legal costs, stamp duty where it applies, working capital
That last one catches people. Buying the business is one cost. Having enough in the bank to pay wages and suppliers in the first few months is another. Don’t spend every dollar on the purchase price.
Make the deal subject to finance
When you sign a contract to buy a business, ask your lawyer about making it conditional on finance. That gives you an out if the funding doesn’t come through. Vendors generally understand; it’s normal.
Questions worth asking any lender or credit professional
You don’t need to know the answers. You just need to ask the questions and listen carefully:
- What do you generally need to see from the business, and from me?
- How do you treat goodwill compared with equipment or property?
- What contribution would you typically expect from a buyer like me?
- What are all the fees, not just the rate?
- How long does your process usually take, and what could slow it down?
- What happens if the business has a bad year after I buy it?
Write the answers down and compare. Different lenders really do see the same deal differently, which is exactly why a licensed professional who knows the market is worth talking to.
A word from someone who’s seen a few
I’ve watched plenty of buyers get excited about a business and only think about the money last. Flip that around. Sort out roughly what you can afford first, then go shopping. It saves heartbreak, and it makes you a much more serious buyer when you do find the right one.
Have a look at what’s out there
Browse all our current listings or look by town: Townsville, Charters Towers and Normanton. For more on how we can help, see our finance page.
Want to chat through a purchase you’re weighing up? Give me a ring. I’ll point you in the right direction, and you’ll get the proper advice from the right people.
Frequently asked questions
How much deposit do I need to buy a business?
It varies a lot between lenders, businesses and buyers. Many buyers find they need a meaningful contribution of their own, often larger than for a home loan, because goodwill is harder to secure against. Speak with a licensed credit professional for your situation.
Can I use my house to buy a business?
Some buyers use equity in property they own as security for business borrowing. It can help, but it puts that property at risk if things go wrong. Get proper advice before you do it.
What is vendor finance?
Vendor finance is when the seller agrees to be paid part of the price later, over an agreed period, instead of all at settlement. It's less common in small business sales but can help bridge a gap. It needs a proper legal agreement.
Will a lender approve my business loan?
No one can promise that. Approval depends on the lender's own criteria, the business, your finances and your experience. This article is general information only and is not credit advice.
General information only. This isn't financial, credit, tax or legal advice and doesn't take your circumstances into account. Get advice from a licensed professional before you act.