Business Purchase Loan: How Acquisition Finance Works
Financing an acquisition of an existing business, or buying out a business partner, is one of the fastest methods of expanding your company’s reach. If a suitable business opportunity arises but you don’t have the capital to hand then the chances are you’ll be looking for business acquisition finance. In this guide we explain how to use a business loan to buy a business and the different business purchase loans that are accessible to Australian SMEs today.
Requirements to Apply for a Business Purchase Loan
Requirements vary from lender to lender but to get the finance to buy a business, applicants are likely to require:
- A registered ABN
- Business is GST registered
- Minimum of 6 months in business
- The balance sheet of the business you’re looking to acquire
- Bank statements
- Tax returns and P&L
- Financial information on the sale and your plans for the business
- Potentially a business plan including profit and loss forecasts and expected cash flow
Acquisition Financing Lenders in Australia: Top 6
- Large and recognisable lender with excellent customer reviews.
- No extra fees for early repayment.
- Experienced lender in financing a business purchase.
Considerations Before Seeking Finance to Buy a Business
In order to avoid wasting time and potentially damaging your credit rating with unsuccessful credit applications, you’ll want to be absolutely sure that the business you’re seeking to acquire is fit-for-purpose and you’re in the position to be successful with your application for business acquisition finance.
Follow our checklist to ensure all bases are covered:
- Be completely sure of the financials that you’re financing a business purchase for. As a minimum look back at the last 3 years of financial statements and the costs you will be inheriting. What would the damage be to revenue if you lost a key customer?
- Understand why the owner wants to sell. Is it simply that they’d like to retire, move location or do they have information on the business/sector that you don’t.
- Have collateral available if seeking over $250,000 or for loan terms beyond 2 years. For larger loans it’s likely that security will be required. This can be assets you own within your existing business or the business you’re looking to acquire. If there are no physical assets, invoice finance could be an option for B2B businesses.
- Have a deposit prepared. To improve chances of securing a business purchase loan, you should be factoring in a substantial deposit of your own. In fact, it’s quite common for lenders to ask for a 35% deposit from applicants seeking a business loan to buy a business. Submitting a cash deposit demonstrates commitment to the opportunity and is more likely to give the lender confidence in the transaction. Prior experience in the industry is usually pretty important too.
Industry Tip: Lenders Are More Cautious with Business Acquisition Finance
One thing that has to be said is that Australian lenders are generally reluctant to finance a business acquisition unless it’s made by a very solid business with a long and steady history. Many of the applicants that come through to our website are actually individuals or very small businesses who want to use the business acquisition loan as a leverage for their business. They aren’t successful now but think that with the finance “push” they could become profitable. Lenders who specialise in short term finance aren’t fond of such applications, and aren’t particularly interested in sharing the risk of expanding an unprofitable business. It would be easier to use a form of secured financing to buy a business or invoice financing.
Business Acquisition Loans: What are Your Options for Finance?
There are a number of ways to fund a business acquisition. Secured loans, unsecured loans, commercial mortgages, asset finance and invoice finance, are some of the most popular methods and are what we cover in this guide.
Note that our guide will focus on business acquisition finance, i.e. debt instruments for financing an acquisition. There are various other ways to raise the capital to acquire a business, such as equity finance – the process of raising capital by finding an investor or investors willing to provide capital in exchange for shares in the business – and whilst we’ll touch on these briefly, this is not our focus.
Secured Loans to Buy a Business
Secured loans are perhaps your cheapest option for business acquisition finance. For most small business owners though, it means using the equity in their own personal home to secure the loan.
The lender will take a ‘charge’ over your home and will be able to sell it if you aren’t able to make your repayments and break the terms of your agreement. By providing a property as security, the lender’s risk is reduced when giving a loan but to counteract that it obviously makes it riskier for the borrower.
A secured business purchase loan is likely to increase your chances of being successful with the application and bag you a lower interest rate but it also means your house is on the line if the business struggles and is unable to keep up with the loan repayments.
Given the current economic environment, regardless of the purpose of the loan, most lenders will look for security when issuing loans over $250,000. So if the business you’re looking to acquire is of greater value than this then your chances of qualifying for an unsecured business purchase loan are slim.
Commercial property, such as warehouses, offices and retail outlets can also be used to secure a loan if your business owns them.
Unsecured Loans to Buy a Business
With an unsecured loan, you will not have to provide any property or assets as security. This provides less risk for the borrower but increases the risk for the lender, so it’s likely to result in higher interest rates and fees for borrowing.
The lending decision is primarily based on business cash flow and you won’t get much more than a month or two’s revenue so it’s unlikely an unsecured business purchase loan will provide the full amount required to acquire another business. But if you already have some capital, an unsecured business loan might bolster your funds to get the acquisition over the line.
As we’ve touched on already, the chances of qualifying for an unsecured loan over $250,000 are pretty slim in the current environment too. So unless the business you’re looking to acquire is worth less than this, financing an acquisition with an unsecured loan is likely a no-go.
With some unsecured loans, you might also be required to provide the lender with a personal guarantee, which means you – as the business owner – will be personally liable to repay the loan if your business is unable to. If you’re purchasing a business as a group, then each director may have to provide a personal guarantee.
Unsecured loans are typically for shorter term borrowing too, so expect maximum payment terms of around 2 years.
Commercial Mortgage to Finance a Business Purchase
If the business you’re looking to acquire owns freehold or leasehold property as part of its assets, then a commercial mortgage may cover a large proportion of the acquisition costs. The commercial mortgage can be used to purchase the business premises as part of a wider finance bundle where you seek to raise funds for the rest of the acquisition elsewhere – whether debt or equity.
The typical value of a mortgage is likely to be 70% – 80% of the agreed purchase price of the property so a deposit from the borrower will be required. Commercial mortgages are also typically for a higher value so you can expect borrowing to begin at around the $250,000 mark.
The terms of the loan will depend on the stability of the business, whilst the rates provided will be based upon the risk of the company.
A commercial mortgage would provide longer repayment terms.
Most Popular Form of Financing for Acquisitions: Asset Finance / Capital Raise
More often than not, borrowers think of turning to asset finance when they require finance to purchase new equipment and machinery for their business. But if you have existing business assets, with no outstanding charges over them by lenders, then you can use these assets to secure a loan which helps to finance a business purchase.
You can either approach an ordinary lender and offer your equipment as collateral or utilise a specialist asset finance lender. By applying with the financing marketplace Lend, your application can be sent to both.
Similar to how you can use the property of the business you’re looking to acquire for a commercial mortgage, if you’re buying a company with valuable assets such as vehicles, equipment or machinery then these can be refinanced or used as collateral to secure a loan.
For Businesses with Unpaid Invoices: Invoice Finance
If the company you’re looking to purchase has business customers and offers payment terms of say 60 or 90 days then they are likely to have a continuous stream of unpaid invoices. One option is to receive finance on the basis of future receivables owed to the business – the unpaid invoices act as security to the lender and because the lender will receive the income from money already due to the business, invoice financing is not regarded as debt finance.
Therefore invoice finance can often be used in conjunction with a debt product such as an unsecured loan or secured loan.
Using a Business Purchase Loan to Buyout Partner
Is using a business partner buyout loan a good idea? If you run a business with a partner, there may come a time when you’ve decided to go separate ways. You might simply have different ideas about the direction of the business, one of you may be looking to try something new in life or one of you might be looking to retire. Whatever the reason is, it can be difficult to attain business partner buyout financing. One of the most common ways of buying out a business partner is using a business loan.
Business Valuation for Partner Buyout
Before using a business purchase loan to buy out a business partner, the partners will need to agree on how much the business is worth. On starting the business you and your partner will have agreed to a shareholder agreement and it should have terms laid out in the event that a partner buyout were to occur.
The shareholder’s agreement should serve as a road map as you and your partner navigate your way over the course of a buyout, but in reality this will not always be the case. Some of the terms might be outdated and no longer relevant, particularly if you haven’t reviewed the shareholder agreement as you’ve grown. Ultimately both partners will have a view on how much the business is worth and it might be that you’re required to seek an independent valuation if you are to agree how much the business is worth.
Are Partner Buyout Loans As Easy To Achieve as Other Types of Business Loan?
Are different types of loan as easy to achieve as the next? The short answer to this question is no they aren’t. Business loans which are directly invested into the business are more likely to assist in achieving a positive ROI, as compared to buying a new business or buying the shares of a business partner. Thus, equipment financing to invest in new plant machinery or a loan to grow the inventory of well selling stock are more likely to be approved by lenders than a purchase business loan to buyout a partner. In partner buyout loans the money isn’t directly connected to achieving ROI as the money is going straight into the pockets of a departing shareholder.
That’s not to say it can’t be achieved though. Particularly if the underlying numbers of your revenue and profit are strong.
A growing number of dedicated small business loan providers in Australia provide partner buyout loans as a part of their business purchase loan offering. In the US, the Small Business Administration (SBA), a government agency that supports small businesses, will assist entrepreneurs and small businesses to buy out a business partner. In Australia however, despite a number of small business grants and support from the government, this doesn’t exist and it’s better to utilise a specialist small business lender.
If you are set to take a business loan to buy out a partner there are a number of things to keep in mind. The terms can often be complex and getting the valuation correct will be important to avoid complicated difficulties down the line. It may prove worthy of seeking legal advice. Some non-bank lenders, depending on your business profile, may provide partner buyout loans without the need for your business to provide security. As always, the online lending companies in Australia will provide a loan decision fast and have funds over to you within 24 hours.
Final Word: Using a Business Loan to Buy a Business
There are a wide number of factors that are critical in understanding whether acquiring a new business is right for you. This goes beyond just the requirements to receive the finance to buy a business. But when you’re ready to make the move it’s important to understand the different business acquisition financing options available. A lender will approach the assessment for financing in a similar fashion to you as the purchaser. They’ll want to know the price you’re paying for the business is reasonable. Remember, they’ll look to consider both your company’s ability to repay a business purchase loan and that of the company you’re wishing to acquire. There may even be assets or property within the business you are seeking a business acquisition loan for, which can improve your chances of financing an acquisition.