How Much Can I Borrow to Buy a Business?

Name: How Much Can I Borrow to Buy a Business?
Creator: Savvy
Published: 2021-11-10T14:27:20+10:30

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Written by , updated on July 3rd, 2024

If you’re looking to purchase an established business, it’s important to find out what finance options you have available and how much you can borrow as part of your loan. Explore and consider your finance options for purchasing a business right here in Savvy's helpful guide to loans for business purchases.

How much money can I borrow to buy an established business?

First and foremost, it’s worth knowing that you won’t be able to borrow the full amount. Most lenders are going to want you to contribute a fair amount to the purchase (perhaps 20% to 50%, depending on the lender and the situation). This means that you can’t just get a loan to buy a business outright – you’ll need to find funds to contribute.

The actual amount a lender will be willing to loan you for the purchase will depend on a number of factors, including your available resources, your recent financial history and your credit rating, so the better your history with business and money is, the better your borrowing power is likely to be. The current success of the business you’re buying will also be a factor. Overall, a business loan could offer from around $5,000 up to well into the millions, as well as short terms of just three months to longer terms of five years or more, for the right customer.

It’s also worth remembering that when you’re buying an established business with a loan, its success and financial standing contribute towards your lending power. As such, lenders realise that if you’re buying a currently successful business, you’re probably going to be well set up to be able to make repayments on the loan in future. You’ll also have access to the business’ assets, so if the sale includes a property, for example, that can then be used for collateral on the loan. The trade off, of course, is that a successful business with good assets is most likely going to cost you a substantial amount more than a struggling one.

What different ways are there to borrow funds to buy a business?

In Australia, a traditional loan isn’t the only way to secure finance to purchase an existing business – it's just one of a range of possibilities. Below are a range of options for securing loan finance.

Unsecured loan – Unsecured loans are available from most lenders across Australia. The interest rates are generally higher than a secured loan, but they’re fast to turn around and relatively easy to get approved. They can potentially offer from around $5,000 to around $300,000 or more, although the maximum amount will vary depending on the lender and the business you’re looking to buy. For instance, you may only be approved for a loan of $30,000 to purchase a particular business but finance up to $50,000 for another if it's seen as being more profitable.
Secured loan – A secured loan (where you have an asset offered as collateral on the loan) can be a little bit more complicated to set up, given the need to assess the suitability of your collateral, but the rates are generally much lower. You can also potentially use the business’ assets as collateral. Secured loans can potentially offer from $10,000 to $20,000 into the millions.
Invoice financing – This is a special type of loan product where you transfer some of the business’ outstanding invoices and transfer them to a lender in exchange for some immediate cash, with the lender collecting the debt on your behalf. This is a handy option if the new business is owed a significant figure in unpaid bills, and could provide from a few thousand to around $100,000 in funds.
Vendor finance – In some cases, the previous owner of the business is also willing to act as the lender, allowing you to pay them for the business over time. They’ll still generally expect you to contribute a significant portion of the business’ value up-front, however, so you still need a deposit.

If you’re exploring lender-based finance for purchasing a business, Savvy is one of the best places to start. You can compare commercial loans from a variety of Australia’s top online business lenders to help you choose one suited to your situation.

Pros and cons of buying an established business with a loan

PROS

Established cash flow

The established business will generally already have cash flowing through the system. The system is already working; you just need to keep it that way.

Employees & internal processes

You already have experienced staff working with established business practices, provided you can keep them.

Established brand

Your business likely already has an established brand and name for itself and an existing customer base. This lessens the need to build your market from the ground up.

Existing supply chain

Your business will probably already have suppliers in place and existing relationships with those suppliers.

Hidden assets

In addition to physical equipment, property and staff, your business might also come with less obvious assets, such as copyrights or patents. These can increase its value quite significantly.

CONS

More established generally means higher price tag

A business that’s doing well already will generally cost more to purchase. You get what you pay for.

Need to manage the change to retain employees

You might need to work hard to prevent key staff leaving as leadership changes and make sure customers don’t lose faith in the brand.

Equipment and processes might be outdated

If an established business has been in action a long time, it might have processes, equipment, or technology that are now out of date.

Less creative freedom

One of the perks of setting up a new business is the freedom to do your own thing. This generally isn’t an option with an established business, though, especially not if you want to retain existing staff.

Potential for existing negative reputation

Sometimes the public perception of a business can be quite negative. This can potentially be difficult to undo, and might be why the business was sold.

Frequently asked questions about your borrowing power

If I borrow funds to buy a business, does it matter if the existing employees don't continue on?

It depends on the business. Some businesses have a high proportion of low skilled workers, and a regular turnover of staff, in which case it’s probably less of an issue. However, many businesses depend on key skillsets or particular people that make a team work, and the loss of those people can be crippling to a small business. It’s worth doing what you can to retain key staff.

How much should I worry about why the owner is selling their business?

It’s always worth doing your homework on why an owner is selling. It might be that they’re retiring, or simply more interested in setting up a business than running one, but if there’s a problem with the business, they might not volunteer that information. For instance, if you're purchasing a caravan park, it's worth checking around to see if you can find out any factors as to why the current owner is selling, such as if there are other successful caravan parks nearby which have taken business away from them.

Is there anyone professional that can help me buy an established business?

Yes – there are various options at your disposal when it comes to seeking out professionals and avenues for advice on buying a business. One option is a business broker, who are professionals with expertise with both finding businesses and securing finance to purchase them. They’re just that, though: an option.

What sort of information will I need to borrow money for an existing business?

Putting together a successful loan application for buying an established business involves some homework. You’ll want a professional valuation on the business you want to buy, a detailed business plan for how you intend to run and/or change things and future projections of how you’re expecting the next few years to play out. Evidence of experience you’ve had with a related business, and any value-add you bring to the new business is also going to help.

If I'm buying a very small business, can I borrow a higher percentage of the business' value?

In Australia, if you only need a small amount of finance to purchase an existing business – perhaps a small popup restaurant, food truck or other micro-business – you have other options on the table for funding. Personal finance might be a more reasonable option at that point (lower amounts means less financial risk), so an unsecured personal loan – or even a small instant loan for amounts of $5,000 or less – might give you the finances you need.

Can I get a good interest rate on a loan to buy an established business?

Possibly – the interest rate you receive will be influenced by both your personal financial history and also the financial track record of the business. If you have a superb credit record and you’re buying a booming business, lenders can offer very good rates.

Compare business loans through Savvy today

Whether you need a small unsecured loan to boost your cash flow or a larger, secured deal to purchase equipment, you can compare a range of competitive online offers through us before you sign on the dotted line.