A loan to buy a business is not like a home loan: the lender is relying on a business you have not yet run, and on you to run it. This guide explains how lenders usually assess an application and how to prepare. For funding options and the costs beyond the price, see our guide to financing a business purchase. Every lender sets its own criteria, so treat what follows as common rather than universal.
How a lender thinks about a business purchase
A lender assessing an acquisition loan is usually weighing three questions. Can the business repay the loan from its verified profit? Can you run it well enough for that profit to continue? And if it fails, what could the lender recover from security and guarantees?
Can the business pay the loan back
Lenders commonly start from the profit the records show, not the asking price or the seller's forecast. They allow for your living costs and the repayments on debts you already have, such as a home loan or credit cards, and look for enough left over to cover the new repayments with a margin for a slow month or a rate rise. Each lender sets its own margin and method.
- Which profit. BizExchange listings label profit as net profit, EBITDA or owner's benefit, but a lender will form its own view from the records. It may not accept add-backs the seller cannot prove (see add-backs and normalised profit).
- Your wage is not spare cash. Owner's benefit includes what the owner takes home, and that has to cover your living costs before it can pay a loan.
- Other borrowing counts. Vendor finance or a loan from family adds repayments too.
business.gov.au suggests working out the maximum repayment you can afford. Our business loan calculator shows repayments at different amounts, rates and terms.
The quality of the financial records
A lender can only rely on figures it can check. Accountant-prepared financial statements, tax returns and Business Activity Statements (BAS) should agree. Where they do not, or the seller says takings are higher than the records show, expect a lender to work from what is documented, if it lends at all. Ask the seller for these records early, and allow time in the contract for the lender to review them. Our due diligence guide covers checking them yourself.
Your experience, plan and contribution
Lenders commonly look at whether you have worked in, managed or owned a similar business. If your experience is thin, a longer handover from the seller, an experienced manager or key staff who are staying can help.
business.gov.au says lenders usually want to see your business plan before they approve a loan. For a purchase, the plan explains why this business, how you will run it, what you will change and how you will manage the main risks, including those of the industry, such as reliance on one licence, a few large customers or seasonal trade. Back it with a cash flow forecast built from the business's actual trading, including quiet months, loan repayments and working capital.
Lenders also commonly expect you to put in some of your own money, and how much varies. Be ready to show where it comes from, and tell the lender if any of it is borrowed.
Security, guarantees and the lease
- Security. business.gov.au explains that a secured loan is backed by something of value, such as property or business inventory, which the lender can take if you do not repay. An asset you borrow to buy, such as a vehicle, can often be the security.
- Goodwill. As a general observation, goodwill is harder to lend against than equipment or property, because its value depends on the business continuing to trade. Where much of the price is goodwill, a lender may want other security or a larger contribution.
- Guarantees. If you buy through a company, a lender may ask the directors for personal guarantees. Moneysmart warns that a guarantor may have to repay the whole loan plus interest, could lose a home used as security, and should get independent legal and accounting advice before signing.
- The lease. Expect a lender to compare the time left on the lease, including options, with the loan term. See our guide to assigning a commercial lease.
What to prepare
business.gov.au notes that requirements vary between loans. For a purchase, expect to need:
- identification for everyone borrowing or guaranteeing
- your business plan and cash flow forecast
- the business's financial statements, tax returns and BAS
- your personal financial position: income, assets, debts and living costs
- the contract or your offer, showing what the price includes
- the lease.
If an application is refused, business.gov.au suggests asking the lender for feedback and working on what you can change.
Check your credit report first
Moneysmart says lenders use your credit score to decide whether to lend to you, and that you have a right to a free copy of your credit report every three months. It lists two main credit reporting bodies and says you can request a free copy from both. Check that the debts listed are yours and your details are right. If something is wrong, ask the credit reporting body to fix it, which is free.
Comparing loan offers
business.gov.au suggests comparing several lenders, including non-bank lenders, and reading each loan's terms and conditions. Look closely at:
- Rate, fees and term. The total cost over the life of the loan, not just the headline rate. A longer term lowers each repayment but usually means more interest overall.
- Security. Exactly what the lender takes, including guarantees and whether your home is included.
- Covenants. Conditions you must keep meeting, such as supplying financial statements. Depending on the contract, breaching one can be a default even if every repayment is on time.
- Early repayment. What it costs to pay the loan out early or refinance.
Responsible lending and business loans
Moneysmart says responsible lending obligations do not apply to business loans. The Australian Financial Complaints Authority (AFCA) explains that small business lending is outside the responsible lending obligations of the National Consumer Credit Protection Act 2009, so there is no test of whether the loan is "unsuitable", and the lender need not make the same level of enquiries as for consumer lending. Much of the job of judging whether you can afford the loan falls on you.
Other protections remain. AFCA considers obligations such as the ASIC Act's implied warranty of due care and skill and its prohibition on misleading or unconscionable conduct.
Government programs
business.gov.au says that, in general, the government doesn't provide finance for starting up or buying a business, though grants may help with things such as research and development, expanding or exporting.
If you have a dispute with a lender
Raise the problem with the lender first.
- AFCA. AFCA offers free dispute resolution to small businesses, which it defines as organisations with fewer than 100 employees, and its determinations bind the financial firm. It can consider complaints about loans, lines of credit, overdrafts and hire purchase, up to a limit on the size of the credit facility. Its online search tool shows whether a firm is a member, which is worth checking before you sign.
- ASBFEO. The Australian Small Business and Family Enterprise Ombudsman helps small businesses and family enterprises in dispute with other businesses, including through access to low-cost legal advice and alternative dispute resolution, and may refer you to an agency better placed to help.
Before you apply
- Get your credit report from both credit reporting bodies and fix any errors.
- Gather the business's statements, tax returns and BAS, and check they agree.
- Test repayments in the business loan calculator against the profit left after your living costs and debts.
- Write your business plan and cash flow forecast.
- Confirm your contribution, the security you can offer and any guarantors.
- Check the time left on the lease against the loan term.
- Compare offers, check the lender's AFCA membership, and have your accountant and solicitor review the loan before you sign.
Questions people ask
How much can I borrow to buy a business?
It varies between lenders and depends on the business's verified profit, your own finances, your contribution and the security you can offer. Lenders generally start by asking whether the profit can meet the repayments after your living costs and other debts, with room to spare. Talking to more than one lender before you make an offer gives you a realistic budget.
Do responsible lending laws apply to a business loan?
Generally not. Moneysmart says responsible lending obligations do not apply to business loans, and AFCA says lending to a small business is not part of the responsible lending obligations under the National Consumer Credit Protection Act 2009. Other protections, such as the ASIC Act's prohibition on misleading or unconscionable conduct, still apply. Ask a solicitor if you are unsure how a particular loan is treated.
Does my personal credit history matter when I borrow for a business?
It can. Moneysmart says lenders use your credit score to decide whether to lend to you, and your credit report lists the credit products you have held, including business loans. You have a right to a free copy of your credit report every three months, so check it for errors before you apply.