Finance to buy a business

Loans to buy a business

A business loan works like other business debt: you borrow a sum from a bank or other lender and repay it over time with interest.¹ Most lenders want the loan secured, meaning you back it with something of value, such as property or business inventory, that the lender can take if you do not repay.¹ If you are borrowing to buy an asset such as a vehicle or equipment, you can often use that asset itself as the security.¹

Before you apply, have ready:¹

• A business plan.
• Recent cash flow statements and financial forecasts.
• Your personal financial information and proof of identification.
• Lease agreements, if you lease your premises.

Compare more than one lender before you commit.¹ Non-bank lenders can be more flexible on what they will accept, but they may charge higher interest rates and fees than banks.² Whoever you deal with, check them on ASIC's register.¹

Vendor finance

Moneysmart defines vendor finance as "where the seller of a house or other asset, such as a car, offers to lend you money to buy the property or asset as part of the sale"³. The same idea applies to an asset such as a business: the seller lends the buyer some of the price instead of the buyer borrowing the whole amount from a bank. In a business sale, this often means a deposit followed by the balance to the seller over an agreed term, on top of or instead of a bank loan.

Sellers offer it for their own reasons: it can help a deal get done when a buyer cannot raise the full amount elsewhere. A seller willing to leave money in the business is a signal worth asking about, not a fact you should take on faith. Vendor finance is still a debt, so treat the agreement with the same care as a bank loan. Ask what security the seller wants. Have your own lawyer check the vendor finance terms before you sign, separately from the sale contract itself.

What lenders look at

Beyond the business plan and cash flow, think about whether the business can service the debt after you take it over, not just before. Responsible lending obligations do not apply to business loans.⁴ Anyone asked to go guarantor on a business loan should read the loan contract with extra care.⁴ A guarantor should get independent accounting and legal advice, ask for the business plan, cash flow forecasts and recent financial statements, and understand that if the business cannot repay, the lender can pursue the guarantor and whatever they offered as security.⁴

Do your due diligence before you commit to a loan. A lender will ask about the same things.

Structuring the money

Few buyers fund a purchase from a single source. Consider structuring the purchase with a bank loan for most of the price, vendor finance or your own cash for the rest, and a contingency held back for working capital once you take over. The rate a lender offers you depends on the loan, the security and the lender, so no one can quote it to you in advance.

If the business is a franchise, the franchisor may have its own preferred lenders or finance arrangements. Ask about those as part of buying a franchise, and get independent advice on them the same way you would any other loan. If you want someone to run the search and negotiation for you, that is the role of a buyer's agent, not of Signetry, which only lists the businesses for sale.