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How to get a bank loan for buying business? An essential guide

Apr 05, 2024

The unfortunate truth is that only half of the new Australian businesses make it past their three-year mark. For some, a better option is to purchase an existing business. It’s less risky when there are already stable processes in place, especially if the business has been established for a few years.

But there’s no denying that buying a business can be very costly. You’ll need to look for alternative financing, like taking a loan to buy a business. Here are some things to consider when trying to get a business purchase loan.

What is a business purchase loan?

To put it simply, a business purchase loan is a loan to buy a business. It’s a common way to get additional finance to buy a business in Australia.

Typically, you will be required to submit an extensive business plan, along with additional financial information to ensure that you are serious about the business you are purchasing. It also helps in determining whether you will have the means to pay it back.

How it works is that you can borrow up to 1 million AUD with a loan term that can go up to 5 years, with options of secured and unsecured loans.

What are the advantages of buying a business?

Pre-organized processes and workflows

Working with existing processes and tweaking them as you see fit is much easier than having to dedicate time and resources to create brand-new processes and workflows from the ground up.

From existing employees to routine systems, you’ll have a framework already laid out for you. With fresh eyes as the new owner, you can instead spend time determining which processes can be improved and optimized rather than stressing about the initial setup.

Brand establishment

Often, new businesses will need to shell out a lot of cash to build their brand awareness. Different marketing and promotion strategies can be quite costly. When they don’t work, it could be thousands of dollars down the drain.

By taking out a loan to purchase a business, you would get an established brand to work with. While you can adjust your branding, it’s still much easier to do that than start from scratch.

Proper cash flow

One of the most important things that you need to get a business off the ground and keep it running is cash flow. It also happens to be one of the most difficult aspects for new businesses, often having to worry about new investors or other financing alternatives to have some cash for daily operations.

While you may need to take out a loan to buy a business, the trade-off is that you’ll get a stable revenue stream from existing customers.

Existing customer base

Having a loyal customer base is extremely beneficial for any business owner. You won’t have to make as many marketing or sales expenses, meaning that you can utilize your funds for improvements in other areas of the business.

Your biggest challenge with an existing customer base is to ensure that you can retain them, which is also very possible to do by enticing them with new or improved products or services should you use company funds to develop them.

Established business network

While having an existing customer base to sell to is one of the most important things for a business, it’s not just customers that you want to worry about. Your business is also a customer of your suppliers and will likely find it difficult to operate without them.

Luckily, one of the benefits of buying a business is that you’ll have an established business network of suppliers and partners. They’ll already know what your company needs and can help you in growing your business.

Financial records and history

Things like steady cash flow, a loyal customer base, and a solid network of operations all add to contribute to a business’ history. Taking out a loan to buy a business will provide you with the added benefit of having existing financial records for your newly acquired business.

Not only will you get a business with a proven reputation, but you also will have an easier time should you want credit given that you have the records to back it up.

You can also explore our article on how to start a business if you're eager to embark on your entrepreneurial journey and build a business from the ground up. Discover essential insights for those who prefer starting their own venture over buying an existing one.

What are the requirements for getting a loan to buy a business?

To get a loan to purchase a business in Australia, you will need to be an Australian citizen or permanent resident. You are also required to have the necessary qualifications to run a business successfully and may be asked about your previous experiences in running a business. Ensure that you have a good credit score to open up business purchase loan options to you.

If you are an owner of a business already and are looking to acquire another one, you will be required to provide proof that your business has been in operation for at least six months and have a steady revenue stream.

A balance sheet that reflects strong finances is an example of a document you will be asked to provide. You will need to submit documents like proof of your qualifications, personal bank statements, tax returns, and financial statements of previous businesses you own.

Lenders are also likely to require documents from the business you’re buying, such as its cash flow statements, balance sheet, bank account statements, and tax returns from the past two years.

Related read: How to get a startup loan in Australia in 2024?

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How to get a loan to buy a business?

Research options

The first step to getting a loan to buy a business is to do your research. There are plenty that you’ll have to research, starting from the market you’re interested in, to the banks that could offer loans to you.

Once you figure out a business that interests you, for example, you’ll want to perform some due diligence. This includes finding out about what the business finances look like, whether or not the company has a good credit score, the brand reputation of the business, and many more.

Other than looking through their records, you can dig deeper into the company by getting customer reviews and talking to its business partners and suppliers. 

At the same time, you don’t want to leave researching business purchase loans too late. Look into which banks are offering a loan to buy a business and see if you could get an idea of their terms.

Prepare documents

There are plenty of documents that you’ll need to submit to get a bank loan to buy a business. Make sure that you are aware of what documents are required from you.

You want to prepare them early on, especially if you know you’ll need supporting documents from the business you’re buying. Communicate with the current owners to get the necessary documents, such as the business’s balance sheet, bank statements, and tax returns, and compile them accordingly.

During this stage, you also want to be working on an extensive business plan for the business you’re buying.

Suggested read: How to get a business loan without collateral in Australia?

Discuss with the banker

Once you have all your documents ready, you can proceed with your application. While you should prepare all your documents before formally asking for a loan to buy a business, it’s also not a bad idea to start your discussion with a business banker early on. You can ask questions and get assistance in ensuring that your application is complete. 

You also don’t want to leave discussions too late to be sure that your funds are ready when it’s time for you to sign the deal. Bankers may need some time to assess your application and the new venture, so you want to allow yourself plenty of time to sort out your loan to buy a business.

What are the things to consider before buying a business?

Understanding the market

As with all things related to business, you’ll want to do an ample amount of research before you pick which businesses you’re looking into buying. From researching the markets and industries to doing a deep dive into different products, you need to be sure that you know the field inside out.

It’s important that you thoroughly understand the market in which the business that you want to buy operates. It’s recommended that you buy a business in a market you’re familiar with.

A proper business plan

Taking a loan to buy a business is not something that should be done lightly or impulsively. Considering that most Australian lenders will require you to have a proper business plan that they approve of before letting you take out a loan as a means of finance to buy a business in Australia, you will need to come up with strategies based on your research.

Having a business plan also helps you steer your new business in the right direction.

Debt to income ratio for buying

There is due diligence that you must do on the company that you’re thinking of purchasing before you acquire it. One thing that you want to pay attention to is the debt-to-income ratio of the business.

Having a good ratio ensures that when you acquire the business, you’ll be able to repay any debts and manage your monthly payments properly without worrying about negative cash flow. A good debt-to-income ratio is typically 43% or below.

Paying closing costs to complete deal

Closing costs refer to the costs incurred outside of the purchase when closing the deal. When you have paid your closing costs, the company will be then transferred from its previous owner to you.

Before you even get to this stage, you want to be sure that you know the terms of the closing costs and settle a mutual agreement between you and the previous owner.

Sufficient funds to pay down payments

If a business doesn’t require you to pay the full purchase price immediately, then you will be expected to pay a down payment to signal that you are serious about buying the business. Alternatively, if you are taking out a loan to buy a business, your lender will likely also require a down payment to mitigate the risks.

Make sure that you have the funds to make that down payment, even when taking out a loan.

Credit score of the business

All of your new company’s assets and liabilities come as a package when you are buying a business. Loan options beyond the initial business purchase loan will be available to you to manage your business finances, but you’ll need a good credit score to get them. It’s important that you are aware of a business’s credit score before you decide to buy them.

This will impact many other financing opportunities available down the road.

Alternative sources of funding to buy a business

1. Business credit line from banks and financial institutions

Many banks offer business credit lines that you can utilize to grow and scale your business, including buying out another existing business. Other non-bank financial institutions may also offer the same thing. Typically, however, you’ll need to have an established business already to get a business credit line.

2. Equity finance

By selling shares, you can raise some capital to fund your new venture. However, keep in mind that equity financing requires you to first have a business, meaning that this method is only applicable to business owners looking to acquire others to scale. You’ll also have to give up some ownership when you sell shares.

3. Angel investors

Angel investors are individuals or entities that invest their personal funds in businesses. Most angel investors are experts in their fields and have plenty of market and industry knowledge. They typically invest in businesses that are just starting out, but you could make a case to get funding to buy an existing business. 

4. Venture capitalists (VCs)

Much like angel investors, venture capitalists, or VCs, will also invest in your business. However, VCs don’t rely on their personal funds, rather drawing from funds from corporations, hedge funds, and other sources. Venture capitalists will likely invest a large amount of money, but may require a business to be in the growth or maturity stage.

5. Business grants

While business grants are typically difficult to acquire, it’s possible to get funding from your federal, state, or local government in the form of a grant. Grants are interest-free funding and do not require you to repay the government. However, keep in mind that you’ll have to meet very specific requirements for a grant.

6. Government-funded schemes

You may be eligible for government-funded schemes to buy a business. They are similar to business grants in that the government is involved in the funding, but there may be different terms compared to business grants. For example, you could get funding in the form of a loan, which, unlike grants, you will have to repay.

7. Own funds

You don’t have to rely on someone else’s money to buy a business. Loan options are great if you are looking for some additional funding, but if you have enough of your own funds, you could purchase a business that way. Be sure that you are aware of how much money you’ll be sinking into it.

How can we help - Volopay!

Getting a loan to buy a business is only the beginning. There’s still so much to do to ensure that your newly acquired business is running smoothly. With a loan repayment that you’ll have to make, there’s no doubt that there is a lot at stake.

You want to make sure that all finances of your business are managed properly and according to your business plan.

With Volopay, you can get access to an expense tracking and management system that will allow you to ensure that company funds are used appropriately.

Tools like corporate cards, accounts payable automation, and accounting integrations can streamline your expense management processes and give you full visibility and control of your business spending.

Tracking where your funds are going and budgeting can be simple tasks. Volopay helps you in making sure that your business plan can be followed through accordingly, making loan repayments a lot less daunting.

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Is it good to get a loan for buying a business?

If you have done some thorough research and have a solid business plan, yes. While taking out a loan to buy a business is not a guarantee for success, buying a business does have many benefits that you can take advantage of. A loan could help you scale faster without burning through resources. 

How much deposit do I need to buy a business?

There is no set value and a deposit will depend from lender to lender. Typically, however, the deposit will be around 10-30% of the loan value.

How to take over an existing business?

To acquire a business, you’ll have to buy it out so that you’re at the very least the majority shareholder. You can partially or fully take over an existing business. There are many steps involved in business acquisition, but it’s important that you do your due diligence before going ahead with the business purchase. If you require additional funding, you can look at other sources such as a business purchase loan to take over the business.