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Buying an existing business, rather than starting one yourself, allows you to hit the ground running with a current client-base, infrastructure and cashflow. Using a loan to fund your business purchase saves you from needing to budget and save for potentially years in order to build up the necessary funds. There are a range of finance options you can apply for, from traditional business loans to funding from venture capitalists and angel investors.
You will need to prove to the lender that your business plan is sound, and so you will usually need financial projections of the business, previous management experience, a clear budget and a good credit score.
Loans to buy established businesses are not as straightforward as getting a business loan for a company you're already running. There are several factors you'll need to consider before you begin the loan application process. These include:
There are many types of business loans, but these are the ones most commonly used for the purchase of an existing small business.
Most of Australia's big banks have funding available for capable new businesses. You're likely to find that small business loans from banks require security. This is usually in the form of commercial or residential real estate.
These are not-for-profit financial institutions owned by their members. Some of these members may be entrepreneurs looking for a good investment. If you're a member of a credit union, you may be able to get funding from them.
Traditional lenders aside, there are online lenders like neobanks and peer-to-peer lenders that may be open to financing the purchase of the business. Compared to traditional lenders, their flexible lending criteria is more flexible and they have fast application processes. However, the borrowing limits may be lower than that of traditional banks.
With this form of finance, the loan is built into the terms of the sale and repaid with future profits. For instance, someone may want to sell a business for $500,000, but you can only afford $200,000. A vendor finance agreement might involve the seller building a $300,000 loan into the sale. The loan will be repaid in the form of 10% of business profits. The exact terms and conditions of these deals vary depending on what you negotiate with the seller.
Did you know? You can borrow against the assets of the business you're buying. These assets include vehicles, equipment, projected business value or you can even secure against outstanding invoices.
The main obstacle between you and finance is your ability to convince the lender you can buy a small business and make it profitable. As a general rule, the following will help you get your application over the line:
You will first need to prove that the business you're looking to buy will be profitable. This means financial statements to back your claim and financial modelling for the future. You will need to consider how profitable the business will be in concrete dollar values and back it up with as much evidence as possible. The lender will make a yes or no decision based largely on whether it's convinced the business will be profitable. You must have formal financial projections.
The lender needs to know you have the experience and capability to bring home these profits. Having relevant small business management and financial experience will inspire more confidence. Don't hesitate to mention how your own business history can help you succeed.
Your credit score determines your creditworthiness. Lenders may consider your personal credit score. If you own an existing business, your business credit history will also be taken into account. The stronger your credit score, the more likely you are to be approved for the loan. You may also be able to secure a lower rate.
You'll need to give the lenders a breakdown of how you plan to spend the money. This information will help the lenders determine when a return on investment can be expected. For instance, if the money is to go towards staff or refurbishment costs, they might expect a slower return on investment. If it's going towards inventory and marketing, they might expect a quicker return.
To get a loan to buy a business, you'll generally need to provide the following information:
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