Running your own small business is an appealing idea if you have the ingenuity and know-how to make it work, but it takes a lot of money to get it up and running. This is where financing comes in. If you're looking to buy a small business, a business loan can give you access to the funds you need.
Find out how to get a business loan and compare your other options below.
Expert overview: 3 things to be aware of when looking for funding to purchase a business
It's a bit trickier to get a business loan to buy an existing business than it is to open a new business, but it can be done.
The more evidence of business success you can supply, the better your chances of being approved. Be prepared with information such as a business plan, the business's existing financial situation and details of your experience in the industry.
An existing business isn't necessarily a good investment. Make sure you conduct due diligence before you make an offer.
Can you get a loan to finance the purchase of a small business?
Yes, but it's not as simple as getting a loan for a business you're already running. When you want to get a company off the ground, your choices are to start fresh or buy an existing business. Buying a small business may be more cost-effective, but you'll inherit all its existing shortcomings, such as a poor location, outdated equipment or a lack of interested customers.
There are three main factors to consider before you even start to look for a lender. If you don't have an answer to each of these three points, it's unlikely a lender will consider offering you money.
Determine how much money you'll need. Borrowing too much means you're paying more in interest than you need to, while borrowing too little means you won't have enough for everything you need and may need to apply for a second loan. Make sure your estimation is as accurate as possible.
Have a solid business plan. It's not enough to simply own a small business, you need to manage it too. Your plan should clearly show how the business will manage expenditures and income to achieve profitability and how long this will take.
Consider your repayment timeline. How long will it take you to pay back the loan? How much will you be able to afford to repay per month? Will it be a consistent amount or can you pay back more as the business grows?
The main obstacle between you and financing is your ability to convince a lender you can buy a small business and make it profitable.
Consider how profitable it will be in concrete dollar values and draw on as much evidence as possible. Your lender will make a yes or no decision based largely on how much you can convince it the business will be profitable. You must have formal financial projections.
Having relevant small business management and financial experience will inspire more confidence in potential lenders. Don't hesitate to mention how your own business history can help you succeed.
Break down what exactly you plan to spend the money on. This is not only necessary for your own planning, but it's also essential information all lenders need to know. If the money will go towards staff or refurbishment costs, for example, they might expect a slower return on investment. If it's going towards inventory and marketing then they might expect a quicker return.
Rather than applying for loans everywhere with a low success rate, your time is better spent honing in on a small number of good products and lenders, then presenting your case. Before you can do this, you need to compare business loans to rule out any with unreasonable interest rates or excessive fees.
Capify Unsecured Business Loan Offer
Capify Unsecured Business Loan Offer
Borrow up to $300,000
Fast application and turnaround
Flexible loan repayments
100% confidential application
Capify Unsecured Business Loan Offer
Apply for up to $300,000 from Capify, enjoy a simple application process and with same-day approval you can have your funds within 24 hours.
The interest rates offered by each provider are indicative interest rates that have been supplied by each provider. These rates change often. Please ensure you confirm the actual interest rate with the relevant provider prior to applying for any loan.
10 ways to finance the purchase of a small business
Getting a loan can be challenging, but an applicant with a good business plan has no shortage of options. Here are 10 ways to get money to buy or start a business:
1. The bank. An obvious choice, most of Australia's big banks have funding available for capable new businesses. You're likely to find small business loans from banks require security, usually in the form of commercial or residential real estate.
2. Credit unions. These are not-for-profit financial institutions owned by their members, some of whom may be entrepreneurs looking for a good investment. If you're a member of a credit union then you might be able to get funding there.
3. Borrow against the business you buy. Did you know it's possible to get a loan by borrowing against the assets of the business you will buy with that loan? If you're buying a company with valuable assets in the form of property, vehicles, equipment or machinery then these can be refinanced or used as collateral for a secured loan. Similar options exist for borrowing against the projected revenue of the business you buy or outstanding invoices.
4. Vendor finance. This is a way of buying a business where the loan is built into the terms of sale and repaid with future profits. For example, someone might want to sell a business for $500,000 but you, the buyer, can only afford $200,000. A vendor finance agreement here might involve the seller building a $300,000 loan into the sale to 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.
5. Venture capitalists. These investors are groups or individuals that aggressively look for big returns on investment and have a particular interest in new startups. They typically offer money in exchange for equity or a share of the company ownership. When the company grows and succeeds this equity multiplies in value, making it a high risk, high return strategy for venture capitalists. To attract venture capitalists you should have a plan for enormous, potentially global, business growth.
6. Angel investors. A more specific type of venture capitalist, angel investors are usually individuals rather than groups. They too want to acquire equity, but usually take a more active role in the success of the company and offer money as well as advice, experience, clout, connections and other priceless intangibles.
7. Government grants. The majority of small business assistance from the government comes in the form of free or inexpensive advisory and guidance services, but there are also small business grants that offer funds to applying businesses that meet certain requirements. For example, you might need to be expanding your business in a certain way, conducting innovative research or breaking new technological ground. There are many different types of grants and each has different purposes and eligibility requirements.
8. Crowdfunding. Crowdfunding is when you go online to ask lots of people to each give a small amount of money. This can be a good litmus test of whether or not the general public is ready to believe in your business. Your success here is largely down to luck, but your odds improve by being skilled in marketing, being able to offer your supporters gifts and freebies and having a promising, well-thought-out business plan.
9. Family and friends. The terms, conditions and benefits you get from these loans depend on how much money your friends and family have and how much they're willing to invest in you. Many successful enterprises got their start with loans from family and friends, so this option shouldn't be disregarded. Remember to keep everything official and professional by keeping a written record of any deals made.
10. Your own savings. If you believe in your business plan then this is a good place to look first. Keep loans down by putting up as much of your own personal savings as you feel comfortable with. Some lenders, particularly angel investors and venture capitalists, will regard this highly and be more likely to invest in your business if you have this kind of personal stake in its success. Use a business loan comparison calculator to compare different options side by side.
What should you consider when you're buying a small business?
There are a variety of factors to consider when purchasing an existing business. It's important to do your due diligence because that's exactly what the banks and business lenders will be doing; if something doesn't add up about the business, you won't get funding.
Here's what to look at when considering whether a business is a good investment:
Reason for the sale. Why is the current owner getting out? If it's anything affecting the future viability of the business then examine it closely.
Profits, assets and inventory. What does the business make and what does it own?
Costs and liabilities. Note down everything the business is currently spending to keep it running day to day and any debts it currently has.
Trading history. Make sure you look at the past performance of the business and note any successes and failures: what has and hasn't worked and why? Is the business affected by market conditions? Has it made it through difficult economic periods?
Business structure. What's the current business structure and will this work for you? If you're looking to keep the current structure in place make sure you're aware of the legal and tax requirements.
Business network. Talk to as many people as you can connected to the business, e.g. suppliers and customers. Get an idea of what they think of the business, its owner and its performance.
Industry. How's the industry performing and what's the current and future demand for the business's products and services? Is the industry evolving and is the business you're buying keeping up with the pace of change?
How much can you borrow to buy a small business?
The amount you're able to borrow when buying an existing business comes down to a number of factors, including 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.
Banks won't always perform business valuations. For example, if the business is turning over less than $1 million a year, the bank will generally not perform a valuation. However, a valuation will be performed if the business is turning over more than this or if it's a business that's particularly affected by market forces, such as a pub.
Depending on the bank's risk appetite and its assessment of the industry the business is operating in, you may be required to provide security or you may not get as large a loan as you were hoping for.
How do banks and lenders value a business?
There are a number of different ways to value a method. One is an asset valuation. This involves the bank calculating the business's assets and subtract the number of debts from this amount. The net asset value will be the value of the business. Remember, tangible and intangible assets will be included. For example, property as well as intellectual property.
Another common valuation method for both small businesses as well as for property is the "cap rate" method. This is where the bank simply works out the net operating income of the business and divides it by the current market value. Banks will usually use the last three years of your profit and loss statements to get your net operating income.
The bank/lender will also take these factors into account when valuing a business:
Invoices the business hasn't paid.
The business contracts and when these are due to end.
Suppliers the business has, the agreements that are in place and whether costs will be increased soon.
Property and whether the business owns or leases. In the case of a lease, how long the lease has remaining.
What do you need to apply for a loan?
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
Compare loans to buy a small business
OnDeck Business Loans Offer
OnDeck Business Loans Offer
Borrow up to $250,000
Same day approval
100% confidential application
OnDeck Business Loans Offer
Apply online and get quick access to the funds your small business needs with a loan of up to $250,000.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We compare from a wide set of major banks, insurers and product issuers.
finder.com.au has access to track details from the product issuers listed on our sites. Although we provide information on the products offered by a wide range of issuers, we don't cover every available product. You should consider whether the products featured on our site are appropriate for your needs and seek independent advice if you have any questions.
Products marked as 'Promoted' or "Advertisement" are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options and find the best option for you.
The identification of a group of products, as 'Top' or 'Best' is a reflection of user preferences based on current website data. On a regular basis, analytics drive the creation of a list of popular products. Where these products are grouped, they appear in no particular order.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment.
We try to take an open and transparent approach and provide a broad based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labelling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
Providing or obtaining an estimated insurance quote through us does not guarantee you can get the insurance. Acceptance by insurance companies is based on things like occupation, health and lifestyle. By providing you with the ability to apply for a credit card or loan we are not guaranteeing that your application will be approved. Your application for credit products is subject to the Provider's terms and conditions as well as their application and lending criteria.