Business Purchase Loans

Name: Business Purchase Loans
Creator: Savvy
Published: 2022-01-05T14:57:23+10:30

Home > Business Loans > Business Purchase Loans

It won't affect your credit score.

Written by , updated on July 26th, 2023

Purchasing an existing small, medium or large business can be a highly effective way to build or expand your investment portfolio. However, they certainly don’t come cheap, so it’s crucial you have a handle on what your options are to help facilitate the purchase.

You can find out more about business purchase loans and how to compare the top business loan offers in Australia right now with Savvy. With partners spanning the country, you can find a wealth of quality information, as well as reputable lending offers, all in one place.

What are business purchase loans and how do they work?

The loan you’ll need to take out to purchase a franchise or business isn’t too dissimilar to other business loans in how they work. These loans are designed to be versatile and can be applied to any business purpose you might need on top of buying it, from adding to your cashflow to fitting out the premises and everything in between.

There are several different types of loans you can look to when seeking out a business purchase depending on the type of business you’re looking to buy. In most cases, you’re likely to be required to be asset-backed, namely in the form of property. This grants you greater borrowing power and a lower interest rate. If you’re wanting to purchase a small, inexpensive business, though, a smaller unsecured business loan could be the best option for you.

Another potential finance option for businesses is a line of credit, which involves business owners drawing from the equity in an asset (primarily property) whenever they need it. This can be not only for the purchase of the business itself, but also its operating costs and other business expenses. Similarly, a business overdraft facility allows you to withdraw up to a limit and can either be secured or unsecured, but comes without any set repayments. It’s important to compare a range of offers with Savvy so you can lock in the best offer for your needs.

How much can I borrow for financing a business purchase?

The amount you’re eligible to borrow is dependent on a variety of individual factors. Lenders will assess your application thoroughly across these variables to ultimately determine your suitability for financing and your ultimate borrowing power. Some of these include:

Your loan security

The value of the asset you use to secure your business loan will have a direct impact on your borrowing capacity. This is because lenders will use this to recoup any funds lost in the event of a default and won’t want to approve you for an amount greater than what would be covered by this repossession and sale. It's important to note, though, that there isn’t any risk of this taking place provided you can stay on top of your repayments.

Your business’ revenue

Of course, you can only borrow as much as you can afford. Lenders will consider the revenue stability of the business you’re looking to buy over an extended period (typically two years) and that of your current business (if you own one) whilst also accounting for the expenses which eat into their disposable incomes. You won’t be approved for an amount which your lender doesn’t believe you’re capable of comfortably repaying, so be sure to apply within your means.

Your credit scores

Lenders will scrutinise both your personal credit score and, if you’re already a business owner, that of your business. Both of these provide solid indications as to your creditworthiness and recent record taking on and repaying debt. This can be anything from previous business, personal or home loans to simply how promptly you’ve been able to pay bills. A higher credit score on both counts will present you as a more trustworthy borrower, likely resulting in a greater potential borrowing power (as well as a lower interest rate).

Your experience

If you’ve run businesses successfully in the past, or are doing so at the time of your application, you’re likely to be seen as a safer bet to lend to than someone without any experience. Showing you can be entrusted with a significant lump sum and reliably repay your debt over your chosen term will open you up to greater borrowing potential. Lenders will also factor in any transferrable skills which may make the transition easier, such as a bar manager looking to buy a bar.

Your plan for the business

Finally, your lender will ask to see a plan for how you intend to ensure the successful running of your business in the form of income forecasts for up to two years into the future. If you’re asked to supply this, it’s better to make it as detailed as possible, so your lender can see where its money is going and how you intend to repay your loan over time when considering your business loan application.

Types of business loan

Unsecured business loans

The most common type of business finance, unsecured loans enable businesses to access the funds they need without attaching an asset to the loan as security. Some lenders may allow you to borrow up to $500,000 and, because there's no collateral, offer same-day approval.

Secured business loans

If your business already owns valuable assets, such as property or expensive equipment, you may choose a secured business loan instead. These loans may increase your borrowing power beyond what an unsecured loan can offer and, crucially, typically come with lower interest rates.

Small business loans

Business loans don't always have to be worth hundreds of thousands. If you're operating a small business and need a boost to help you keep on top of your expenses or expand your company, you may be able to take out a loan starting from as little as $5,000 and unlock further capital.

Low doc business loans

Just because you don't have all the required documents for a standard business loan doesn't mean you're out of options. Low doc finance enables you to use alternative documentation, such as other business financials, in the application process to access the funds you need.

Lines of credit

A commercial line of credit allows you to draw from your loan account whenever your business needs access to their funds, instead of managing a lump sum and repaying it like a regular loan. This can add flexibility to your finance arrangement, providing money when you need it.

Invoice finance

Invoice finance presents another option to business operators looking to free up cash through outstanding invoices yet to be paid by their customers. Your invoice finance can either be invoice discounting or factoring, which present different options when it comes to your invoices.

Equipment loans

A common reason for seeking out a loan is to purchase commercial equipment. You can do this either with an unsecured arrangement or one with the equipment itself as collateral, with the latter potentially increasing your borrowing power and lowering your interest rate.

Supply chain finance

With this finance, when your business purchases product, your supplier provides an invoice which you send to your financier and pledge to repay by a set date. From there, your supplier sells the invoice to your financier at a discounted rate, while you repay the full amount to your financier.

Inventory finance

Under an inventory finance agreement, your lender pays your supplier directly for inventory, which allows it to be signed off and sent to you. From there, you can pay off your debt within a pre-determined period to your lender, which may be longer than the regular debtor period.

Overdraft facility

An overdraft facility is attached to an existing financial account belonging to your business, such as a transaction or savings account, and enables you to borrow up to a set limit after the account’s balance reaches zero. These overdrafts are repaid with interest, but only on what you use.

Cash flow loans

You may simply be in a position where your business needs a boost to its cash flow. If this is the case, there’s a range of stop-gap solutions which may be suitable for your situation, from standard unsecured loans to specialist cash flow loans, invoice finance or even an overdraft.

Why compare business loans through Savvy?

100% free service

It won't cost you a cent to compare a range of business loans through Savvy, enabling you to come back at any time.

Reputable lending partners

You can compare business loan offers through a range of trusted Australian lenders, giving you more confidence in the process.

Online comparison process

You can fill out our simple online form to generate business finance quotes tailored to your business' needs in minutes.

Top tips for what to do before buying a business

Look to a business loan broker

Receiving assistance from a broker when it comes to securing the loan to purchase your business can help you out. They'll be able to help you sort through the pages of documents required, as well as unpack any potential debts and other liabilities currently present with the business you’re looking to buy. Going through a broker can help you find a high-quality product.

Analyse market trends and competitors

Crucially, you should do your own research into the viability of the business moving forward. If sales across your industry are on a downward trend in favour of a new industry, it may not be worth buying into what may end up being a sinking ship.

Consider why the current owner is looking to sell

It’s important to get to the bottom of why the current owner is open to selling the business, or actively seeking out its purchase. You may come across what appears to be a great deal on a business, but only later find it’s mired in debt and the subject of legal action. You should never buy a business without knowing the state of its finances.

Analyse market trends and competitors

Common business purchase loan questions answered

Can I borrow above the cost of my business purchase?

Yes – provided you can afford to repay the loan you’re applying for, you can borrow any amount up to your lender’s loan limit. The amount you borrow doesn’t have to be directly tied to the value of the business, as it isn’t being used as security for your loan.

How long can I take to repay my loan?

You can choose the length of time your loan runs for, with lenders offering loans over terms as short as three months for small business loans and as long as ten years or more depending on the type of finance you choose. If you want to see what your loan might cost you overall, you can use Savvy's business loan repayment calculator.

Am I able to buy a business with a caveat loan?

Not really – caveat loans are a fast type of secured business finance which use your property as security for the loan. Lenders generally cap your borrowing power at 70% to 90% of the value of your property. However, because these loans are short-term injections of funds, you won’t typically be able to repay your debt over more than 12 months, which can put significant strain on your business’ cashflow. In general, you’re likely to be better off taking at least a few years to do so.

What if I find an angel investor?

An angel investor is another option when it comes to financing your business. Because they’re individual entities, they can potentially invest more than lenders are willing to if they believe in your idea. However, by investing their money, angel investors will also take on a stake in the business, giving them a say in its operations.

How quickly can my loan be processed?

Business loans are faster when it comes to their approval time than other types of finance, with unsecured loans only taking as little as 24 hours between submitting your application and receiving your funds. Secured loans will take a few further days to process, however, as lenders will need to assess the suitability of your collateral and the financials of each business involved.

Which documents will I need for my application?

The main documents you’ll need for your application include:

Personal ID (driver’s licence or passport)
ABN/ACN and GST registration
Business and personal bank statements
Record of rent
Business financials for both your current business and the one you’re looking to buy, which include balance sheets, profit and loss statements, tax returns and a detailed business plan

What are the advantages of buying a business?

There are several key advantages to accessing finance to purchase an existing business over taking out a loan to help you set up your own. Because internal structures, procedures and staff are likely to still all be in place, you can save on potential set-up costs that you might otherwise be required to budget for. Additionally, you may not need to work as hard to get its name out there if it’s already well-established, reducing marketing costs.

If my business trades across Australia, will I still be able to access financing?

Yes – you won’t need to apply for a geocentric business loan, as lenders offer 100% online financing for businesses across Australia. This means it doesn’t matter whether you’re looking for a loan in Brisbane or applying for finance in Adelaide: you can still access the same product provided you can meet the various eligibility criteria your lender sets in place.