Compare loans to buy an existing business

Taking out a loan to buy an existing business

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.

What should I think about when taking out a loan for a small business?

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:

• How much money will you need? You'll have to work out how much money you need to borrow. If you borrow too much, you'll be paying more in interest than you need to. If you borrow too little, you won't have enough to cover your costs. As a result, you may need to apply for a second loan. You need to take into consideration all the costs involved. If relevant, you'll also have to ensure you have enough capital to keep your business going.
• Do you have a sound business plan? It's not just about buying the business – it's also about how you'll manage it. The lender will want to know your plan. You should be able to demonstrate how the business will manage expenditure and income, how it will achieve profitability and how long this will take.
• Have you considered your application timeline? It can take anywhere from hours to months to qualify for a business loan. You need to consider whether you'll get funding when you want it. This may be a consideration if the timeline to buy the business is tight. You should take into account how long lenders take to process loan applications. Bank loans generally take longer, sometimes even months. However, alternative lenders have faster approval and processing times. You could even receive funds the same day or the next working day.
• How will you make your repayments? You'll need to work out how long it will take for you to pay back the loan. How much will you be able to afford to repay every month? Will it be a consistent amount or can you pay back more as the business grows? Will you be able to make your repayments from the cash generated from the business?

Where can I take out a loan to buy a business?

There are many types of business loans, but these are the ones most commonly used for the purchase of an existing small business.

Banks

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.

Credit unions

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.

Alternative lenders

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.

Vendor finance

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.

What do I need to improve my odds of approval for a business loan?

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:

Evidence

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.

Experience

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.

A strong personal and business credit score

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.

A budget

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.

Looking to buy a franchise?

Looking to buy a franchise? Check out our guide to franchise loan options.

What do I need to prepare for my loan application?

To get a loan to buy a business, you'll generally need to provide the following information:

• The current balance sheet of the business
• Tax returns and profit and loss statements
• Your personal information, including your qualifications and details of your assets and liabilities
• Financial information of the sale or how much you plan to invest in the business
• A business plan including profit and loss forecasts and expected cash flow

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Frequently Asked Questions

• How much can I borrow to buy a business?

  In general, the borrowing amount for bank loans varies based on the type of loan. It's typically lower for unsecured loans and higher for secured loans. Some banks offer up to $250,000 for unsecured loans and loan amounts over $1,000,000 for secured loans.

  The exact amount you're able to borrow when buying an existing business comes down to a number of factors. These include the business's financials, how much the business is valued for, whether or not you're also purchasing property and the supporting documents you provide, such as business plans and cash flow projections.

• How do I value the business I want to buy?

  Valuing a business can be tricky, and a lot of factors need to be weighed up. Some of the most common include:

  • • The current marketplace value of similar businesses
    • Return on investment
    • The business value of the assets, including both tangible and intangible assets, goodwill and depreciation
    • The estimated cost of starting a similar business from scratch
    • The projected future profit of the business

  Given that valuations can be a complex process, you should consider getting professional advice from your accountant, business advisor or business broker.

• What should I expect from the application process?

  Here's what the loan application process for the purchase of a small business will look like:

  • • Lodge an enquiry. You've carefully compared your options and found a loan you think is right for you. The first step is lodging an enquiry. To do this, click "Go to site" on the lender of your choice. Most online lenders have a short online enquiry form for you to fill out. Some lenders may require a phone call instead. Almost all lenders will get back to you with more information within 48 hours.
    • Provide key information. Your lender will want your business plan, including financial figures and information about the business you are hoping to buy. This generally includes data about its profitability, cash flow, sales forecasts and growth potential. The lender in question will be looking for evidence that the business and plans for growth are sound. This is to ensure you're able to repay the loan.
    • Provide equity. Depending on the lender, you may need to invest some of your own money into the purchase of the business. This reassures the lender you're invested in the company's success moving into the future.
    • Provide proof of security. If you're applying for a secured business loan, you will have to provide details of your asset security, as well as proof of ownership. This may include a copy of the deeds to your house or a commercial property you own, or an invoice from your car dealer, etc.
    • Receive funding. If everything has been approved by your lender, you will receive the funding you require for your new business. You may be able to apply for further business funding in the future, should you require it. This will depend on the loan you opt for and the arrangement you have with your lender.

Written by

Elizabeth Barry

Lead Editor

Elizabeth Barry was the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review. See full bio

Elizabeth's expertise

Elizabeth has written 247 Finder guides across topics including:

• Banking
• Personal finance
• Investing

Co-written by

Bria Horne

Writer

Bria Horne is a writer for Finder, with a specialist knowledge of personal loans, car loans and business loans. Originally from the UK, Bria has been a professional personal finance writer in Australia for over 2 years. She has an M.A and B.A in Philosophy and Literature from the University of Sussex, and previously worked on the UK’s leading hospitality publication. See full bio