3 best ways to secure business finance to buy a business

If you're one of the many Aussies looking to ditch the 9-5 and run your own business, or if you are an existing business owner looking to expand by acquiring another business, then you may be trying to work out how you can fund your purchase. Depending on how the business is structured, will determine the types of finance options available to you. There are an many types of businesses out there, but we can group most of them all into three types of structures.

1. Freehold property business - a business that is sold with the property it operates in, so you are buying the commercial property and the business.

2. Leasehold property business - a business that is sold in a property that is leased, so you are buying the business and the lease for the commercial property that the business is operating in.

3. Business only - where there is no lease or ownership of property involved.

For all of these purchases you will need a deposit and then you will need the balance of the funds to complete the purchase.

1. Freehold Property Business

The freehold property business sale might look like this: -

• Commercial property price $1M

• Business price including stock $400k

• Total asking price $1.4M

The lender will allow you to borrow against the commercial property, but usually wont allow you to borrow against the business, unless the business has substantial assets to borrow against. So lets assume you can only borrow against the commercial property and that the lender will only allow a maximum loan to value ratio (LVR) of 70%.

$1M x 70% = $700k, so the deposit is $300k and the lender will loan you $700k to purchase the commercial property. Because we can't borrow against the business, we also need an additional $400k for the business portion of the purchase on top of the deposit, so the total funds you need to provide for the purchase is $300k + $400K = $700k. This excludes other costs such as valuation, legal and stamp duty fees or any lender fees.

This $700k can of course be cash you have, but most likely it will come from equity that you have in property that you own, which could be your family home, a residential or commercial investment property. When working out how much equity you have, you need to consider the maximum LVR that the lender will allow and this is usually 80% when borrowing against a residential property for a commercial purchase. So if you have a property value of $1.3M, then the maximum a lender will loan you against the property is $1.3M x 80% = $1,040,00 and if you owe $300k on your mortgage, then you have $1,040,000 - $300k = $740k of available equity to use. This is enough for the $700k required, but remember that you need to pay for the other costs I mentioned earlier.

2. Lease hold property or business only

When the business operates within a lease or is just a business with no physical building, then you do not have the commercial property component to borrow against. In this situation, you will only have the option of cash savings or using the equity in any property that you own. So if we use the example above where the home is worth $1.3M, with $300k owing and borrowing up to 80% LVR, there is a total of $740k in equity available to purchase a business, which you would then add any cash savings to.

3. Paying off the loan

When assessing your ability to repay the loan, the lender will look at the strength of the profits of the business that you are looking to purchase. Ideally they want the business to be able to make all of the repayments required for all loans. This means that they look at the loans borrowed against your property as well as the loans against the new commercial property. The lender does not want you to be put under financial stress due to trying to make the extra repayments for the equity you took out of your home for example. The lender will also take into consideration any ability you have in your personal finances to contribute towards the loan, but it is always good for the business to be able to support itself.

So when reviewing a businesses financials, always make sure that there is enough profit to easily afford the repayments and if the business is seasonal, make sure the business can afford the repayments during the quiet months, or that cashflow allows for cash reserves to make repayments when sales are slow.

The lender will also ask you to submit a business plan and cashflow projections for at least the next 12 months. The lender wants to see that you understand the business, that you have plans to grow the business and that you understand the drivers impacting cashflow, which all help to show the lender that you will be able to operate a profitable business and be able to make the repayments.

If you need funding to purchase a business, regardless of size, then please reach out. I would love to hear about your story and what you want to achieve next.

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Shane Duffy is the founder of Finance Story, a finance brokerage dedicate to helping businesses grow, particularly through the use of technology. Shane has 25 years of manufacturing and supply chain experience in the areas of operations, IT, consulting and solution design. He uses this experience in his finance broking business to develop specialised financial solutions for his clients.

This article is intended as information only and does not constitute legal or financial advice. Please seek independent legal and financial advice when assessing the feasibility of any project.

Shane Duffy - Sep 2021