What Is a Business Loan?
Any sum of capital you borrow from an external source for your business journey is a business loan.
Business loans are a great option for those looking to buy a business, and there are multiple options available from banks across Australia. However, they require financial responsibility.
A business loan is often accompanied with fixed interest rates or variable interest rates, and you can design a monthly repayment plan suited around your business’s cashflow requirements and finances.
Typical business loans in Australia can be repaid over 1 to 20 years, and you can put in place several types of security to secure the loan.
It is possible to get an unsecured business loan, and in fact, many small business owners in Australia do this. The administration required for a loan is relatively straightforward, and lenders are well-equipped to provide support to small business owners on any queries they may have.
However, be sure to review the terms and conditions of the loan products offered by the bank or financial lender to understand which type of loan is best suited to the needs of your business.
Should You Buy a Business Instead of Starting a New One?
There are various advantages of buying a business instead of starting one, including the higher likelihood of getting a business loan to purchase one. Firstly, finding a business that you’re interested in is very easy, and you can access thousands of businesses for sale.
If you’re an avid business investor or an established business owner looking to expand your portfolio through acquiring a high net-worth business, then you can explore MergerVault, an online service that lists high-value businesses for sale and connects qualified buyers and sellers.
With an existing business, there is already a proven business structure, model, and likelihood of profitability. Therefore, it is less risky than starting your own business from scratch – which is achievable but can turn costly very quickly. Other advantages of buying a business include:
We all know that cashflow is a key risk in startups. Buying an existing business means that a viable operating cash flow model is already in place, and the business you acquire will hopefully have revenue coming in to offset any expenses it may incur.
Established processes and workflows
An already-existing business will come with established processes and workflows which will save time and money. This will also provide an opportunity conduct a review of the business and any accompanying processes so that you can develop ways to optimize them.
It takes months - if not years - for many startups to develop credibility and build a brand. By taking over an existing business, you would already have won half the battle. Your focus will be molding the brand into the strategic direction which you see the business moving in.
Pre-existing customer base
Along with a brand that you can work with, you’ll likely have an existing list of customers who have previously engaged with the business. A strong customer base is an asset for a business, so ensure you communicate any changes to them.
Depending on the type of business, you would also get an established network of suppliers, transport specialists, marketing, a legal team, and accounting professionals.
Many franchises come with established networks and localized knowledge of their respective operations. Buying a franchise is another sustainable route to business ownership.
Existing businesses will likely have a proven working business model and existing cashflow which makes them a better option for investors and lenders. Having a proven financial history along with some assets assigned to the business provides greater credibility for financial lenders, thereby increasing the likelihood of expanding the business and securing a business loan for it.
However, it is still crucial that you conduct appropriate due diligence and evaluate the worth of the business before applying for a loan.
Valuing a Business Before You Apply For Funding
There are considerations if you are an aspiring entrepreneur looking to take up a loan to acquire a business. Here are some key points you need to review before presenting your case to a lender:
Businesses are always up for sale, especially in a post-pandemic world. It is important to conduct thorough market research to understand if the business you want to acquire – and its sector - are viable and sustainable options. Conducting market research can help you understand the forecasted cash flow so that the business loan can be repaid off in a timely manner.
You can use business benchmark tools such as the Australia Taxation Office (ATO) to understand how your future business would perform compared to other businesses in the market.
Reviewing the financials
It is important to review the past and forecasted financials of your target. Be it a new or existing business that you intend on acquiring, both tangible and intangible assets should be reviewed, including its liabilities.
You should also review goodwill and reputation, which often come with existing businesses, and associated contracts or established operations. Understanding these key factors can help you evaluate your business better and aid greatly in the loan application process.
If you would like to understand valuing a business on a deeper level, you can read our guide on valuing a business. Likewise, if you’d like to get an accurate valuation of the business you’d like to acquire, you can use ValueRight. This tool is a free, online valuation tool that provides a pragmatic valuation based on information a user submits.
Considerations Before You Think About Financing Options
Understanding your market
As mentioned earlier, understanding your market is key to assessing your financing options for your acquisition. Understanding the market will provide practical insights on the industry you’re targeting, adjacent industries that you could potentially tap into, as well as your customer profile.
A sufficient down payment
In Australia, a down payment of between 10% to 30% is required when repaying a business loan. The exact down payment required differs from product to product, as well as from financial loan providers. Some loan providers are open to having a collateral asset in place of the down payment.
Funds to pay for interest rates
Interest rates for a business loan are decided when a loan is taken out. Banks generally have a lower interest rate but a lower borrowing amount, and private financial lenders have a higher interest rate but a higher borrowing amount.
Acceptable credit score in your jurisdiction
There is no differentiation of credit score requirements on a state level. Generally, a score between 666 to 755 is considered ‘good’, while a score between 756 to 840 is considered ‘very good’. If a score is above 841, it’s viewed as ‘excellent’.
You can check for your credit score by heading to Canstar and register for an account.
Your debt-to-income ratio (DTI Ratio)
It is easy to calculate your debt-to-income ratio. Simply sum up all of your monthly debt amounts, including any loans, mortgage or rental payments, credit card monthly payments, child support or alimony, etc. and divide that sum with your monthly income. Here’s an example to illustrate this:
Monthly debt = $2,500
Gross monthly income = $7,000,
DTI Ratio = 2,500/7,000=0.357 (0.36 or 36%)
Cash reserve to pay closing costs
Closing transactions often incur expenses which would have to be paid by either the buyer or seller. To be sure of your financing options, it is best to set aside a contingency plan for paying closing costs so that you have a smooth closing transaction.
A business plan with financial projections is a must! It will help to understand when cash injections are needed from investors and when the right time to take a business loan would be.
It is advisable to get your business plan drafted by a professional, and to get the plan vetted by an accountant. Be sure to include all items in the financial planning, including tax returns and lines of credit relating to your business.
Negotiating the best finance terms
When you purchase your business, always assess the financing options available to help support your decision. It is best to speak with professionals such as commercial financial advisors, commercial M&A advisors (for mid-to-large enterprise acquisitions) and with your trusted accountant to understand the best financing terms in the market.
Understanding the best repayment terms and interest rates will mean your loan is tailored to your specific needs. Get advice from professionals who’ve worked across several cases, as they can help you negotiate loan terms for purchasing your business.
Types of Funding to Purchase Your Business
While there are various funding sources available to purchase a business in Australia, the standard approach most entrepreneurs take is to approach a bank. Let’s look at five common funding structures you can use in Australia and how you can obtain the funding for it.
As the name goes, unsecured means that there is no collateral that is put down to secure the business loan. This means that the bank has to rely on some form of assurance. This would include the borrower having a robust credit score, as well as proof to show that the business would be profitable in the future so that the bank has assurance on receiving their money back.
To obtain an unsecured loan, you can visit a bank’s website and search for unsecured loans. There is often a virtual application processes you can use to apply for the loan. Most banks provide this product, including NAB and CBA. If you would like to understand which unsecured loan in market would be favorable to your business acquisition, then you can visit loan comparison pages like Lend.
If you intend to take over a physical business space as part of the transaction of purchasing a new business, then you can consider taking a commercial mortgage from an Australian bank. For more information on the type of commercial mortgages available to you and how you can apply to it, you can visit Finder. This is an informative website which can help compare the terms of commercial mortgages available in Australia.
Asset finance refers to using assets as a form of collateral against a loan. For more information on the various asset financing options available in Australia and how you can apply for them, you can refer to Small Business Loans Australia.
Asset-based lending looks at combining all inventory, receivables, leasing real estate and equipment into one borrowing base, which thereby increases the capacity of debt available to the borrower. Think of it as an extension to asset finance, where instead of putting a single product down for collateral as part of the loan structure, you’d be including in more items from your inventory.
To obtain an asset-based lending loan, you can visit a bank’s website of your choice and reach out to a banker, who can give you specific advice on the type of asset-based lending options they have available. They should also be able to walk you through the application process too.
Combination loan would be a customized loan structure that is made up of two different loan types. For example, a combination loan would be a 50% secured loan, 25% unsecured loan and 25% from asset finance. Given the degree of customization required for this type of loan, it is best if you spoke to a banker who can walk you through a tailored solution. ANZ bank provides a good option for combination loans.
Other Sources of Funding You Can Consider
Australia has many angel investors. All you have to do is reach out and connect with them. Many Australian angel investors have purchased businesses themselves and can provide you with insights on how this can be done along with funding. Here’s a list of sources for angel investors across the Australian states and territories:
There are various business grants in Australia, but it may be difficult to find one that is specifically catered to business acquisitions. Nonetheless, you can research different funding options on the Australian Government website, or you can explore different grants in our grants guide.
Government-guaranteed lending scheme
Australia’s government lending scheme comes with clear criteria on how funding can be obtained. One such example is the SME Recovery Loan Scheme, which closes on June 2022.
Friends and family
You can invite a friend or family member to help with the purchase, and you can offer equity or something in return for their funding. Often, this source of funding will come with much support as your family and friends will want to see you succeed. However, always be sure to have a contract in place in case things turn sour.
Venture capitalists (VCs)
There are numerous VCs across territories in Australia which can provide you with funding for your business venture. Here are VCs available in each territory:
Many equity finance firms and venture capital firms which assist in equity financing options take in clients from across Australia. As such, a national lens can be applied to the options here. Here are some equity finance firms in Australia which can help you structure your equity financing model for your acquisition:
If you have capital saved up and are generating passive income from your existing portfolio, then relying on your own funds is feasible. Ensure that you have professional advice from an accountant or financial advisor to ensure you have enough liquidity to prevent debts being incurred.
Banks in Australia span across the nation. As such, you can obtain bank funding from any of the regions in Australia. Business acquisition funding products in Australia include the commercial loan by Bank Australia which comes with a 3.79% fixed interest, NAB’s business loan options whereby you can borrow a quick loan of up to $250,000 or Bank of Queensland’s business term loan which has a Loan-to-Value Ratio up to 90%.
It's Time to Buy Your Business
Purchasing a business can be nerve-wrecking, given the multitude of financing factors to consider before closing the transaction.
From banks to investors, there are several options available in Australia which can help you gain the funding you need. If you need other support throughout your venture, contact our team at any time.
We wish you every success on your business journey!