How to finance a business purchase: loans, vendor finance and other options

Most business purchases are paid for with a mix of the buyer's own money and borrowed money, and sometimes with help from the seller. Knowing your options before you make an offer lets you make it subject to the right conditions and avoid losing a deposit. To test repayments on different loan amounts, use our business loan calculator.

Work out the full cost first

The asking price is not the whole bill. Budget for:

• Stock. Often paid on top of the price at settlement.
• Working capital. Money to pay wages, rent and suppliers before customers pay you.
• Professional fees. An accountant for due diligence and a solicitor for the contract and lease.
• Duty. Some states and territories charge duty on the transfer of business assets such as goodwill, and others do not. Check with your state or territory revenue office.
• Lease costs. A bank guarantee or bond for the landlord, and sometimes legal costs for the lease assignment.
• Other set-up costs. Licence transfers, insurance, and any equipment you need to replace or add.

Business loans from banks and other lenders

A business loan is a sum you borrow and repay over time with interest. Loans can be secured against an asset, often property, or unsecured. Unsecured loans usually cost more because the lender has less protection.

When you apply, lenders typically look at:

• Your experience. Whether you have run a business, or worked in the industry, before.
• The business's ability to repay. Its financial records and how comfortably its profit covers the repayments, your living costs and the unexpected.
• Security. What the lender can rely on if the loan is not repaid.
• Your contribution. How much of your own money you are putting in.

Have the business's financial statements, your plan for running it, a cash flow forecast and your personal financial position ready. Non-bank lenders may be more flexible about some of these, but business.gov.au notes they may charge higher interest rates and fees than traditional banks. Our guide to what lenders look for goes further.

Vendor finance

With vendor finance, the seller agrees to receive part of the price later, in instalments, instead of all of it at settlement. It can bridge a gap between what a bank will lend and the price, and a seller who offers it is showing some confidence in the business.

It needs to be documented properly by a solicitor: the amount, interest, repayment dates, what happens if a payment is missed, and any security the seller holds over the business. As a buyer, make sure the arrangement still works if the business has a slow few months. See our vendor finance guide.

Earn-outs

In an earn-out, part of the price depends on how the business performs after the sale, for example a further payment if revenue or profit reaches an agreed level in the first year. Earn-outs can bridge a disagreement about value, but they cause disputes when the measure is vague. Define exactly what is measured, how, over what period and who controls the decisions that affect it. Earn-outs also have tax consequences for the seller, so both sides should get accounting advice. See our earn-outs guide.

Equipment and asset finance

If the purchase includes, or you will need to buy, significant equipment or vehicles, asset finance such as hire purchase or a chattel mortgage may be cheaper or easier to obtain than a general business loan, because the equipment itself is the security. Check what existing finance is attached to equipment in the sale: a search of the Personal Property Securities Register will show registered security interests.

Family, partners and investors

Money from family, a business partner or an investor can come as a loan or in return for a share of the business. Put the arrangement in writing either way: how much, on what terms, who makes decisions and what happens if someone wants out. Mixing family and business without a written agreement is a common source of disputes.

Make your offer subject to finance

If you need to borrow, make your offer and the contract subject to finance approval, with enough time to get unconditional approval from your lender. Without that condition you could be committed to the purchase, and lose your deposit, if the loan falls through. Ask your solicitor to set a realistic date and to explain what you must do to rely on the condition.