Compare loans to buy an existing business

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? Consider all the costs involved in buying and running the business. If you borrow too much, you'll pay more in interest than you need to. If you borrow too little, you won't have enough to cover your costs.
• 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, particularly if the timeline to buy the business is tight. You can ask a commercial broker or a lender directly to find out average approval times.
• How will you make your repayments? Work out how long it'll take for you to pay back the loan and whether you can afford the monthly repayments every month for that time.

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

Online lenders like neobanks and peer-to-peer lenders may be open to financing the purchase of the business. Compared to traditional lenders, their 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 vendor 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.

Our expert says: Do the maths

"Run the numbers very carefully. You need to be sure the income the business earns each month is more than enough to cover all of the running costs and the loan repayment, with enough profit left over for you to get paid yourself. It's also very risky to take out a business loan for a business if you don't have a rainy day account: I'd recommend at least $10,000 set aside to dip into for emergencies."

Sarah Megginson

Personal finance expert + media spokesperson

What do I need to do 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'll need to prove the business will be profitable. This means financial statements to back your claim and financial modelling for the future. 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

Show that you have the experience and capability to bring home these profits. Having relevant small business management and financial experience will inspire more confidence.

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.

What do I need to do 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

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

Journalist

Elizabeth Barry is an experienced journalist with over 10 years of expertise in personal finance, contributing to outlets like the ABC, Sydney Morning Herald, and 7News. She holds a Master of Arts in Creative Writing and a Bachelor of Arts in Communication from the University of Technology Sydney, and has earned multiple award nominations, including a Highly Commended recognition at the 2017 Lizzies. Elizabeth began her career at Finder in 2013, progressing through roles to become Lead Editor, where she oversaw a wide range of personal finance coverage until 2024. See full bio

Elizabeth's expertise

Elizabeth has written 202 Finder guides across topics including:

• Banking
• Personal finance
• Investing

Co-written by

Bria Horne

Writer

Bria Horne was 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