With rising interest rates, bank reluctance to lend, and overall tightening on finances and household budgets, it’s fair to assume that buying a business would be an insurmountable task right now.
However, over 50 business buyers currently in the process of buying a business report differently in BusinessesForSale.com’s latest survey.
Australian business buyers are savvy, with most using a combination of sources to fund the business purchase. This includes releasing equity in their homes, using savings, using superannuation, the disposal of any surplus assets, and using more traditional methods such as bank loans as a last resort.
Here are the most popular finance sources that Australian business buyers are pursuing.
Cash is king
With most participants buying or looking to buy a business between $100,000 - $1 million AUD, cash is the most popular form of finance. In an effort to minimise inflation, the Reserve Bank has recently implemented another increase in interest rates, so taking on debt through a loan is not buyers’ first choice.
Cash being the highest chosen form of finance is not surprising; this method offers multiple benefits, including financial flexibility, negotiation power and an ability to purchase other assets quickly.
Home equity finance
Home equity finance is the second most popular finance route that Australian buyers are pursuing. Some entrepreneurs are turning their home equity into cash, which often has lower interest rates and manageable repayment terms.
However, we recommend that buyers do not rely solely on home equity to purchase a business, but rather a combination of different finance methods.
Bank loans and vendor finance
Bank loans are still considered an accessible form of finance, but it is not buyers’ first choice.
Buyers are also exploring alternative methods of finance with the seller, particularly vendor finance or earnout structures with a handful of buyers currently exploring this option.
This could be a win-win situation as this option offers the seller some cash injection and ongoing income which might be more appealing to them than cashing in the whole asset.
Other key insights from the survey include:
- Australian buyers are interested in the hospitality and retail sector. Despite these sectors being severely impacted by recent economic challenges, they have great opportunity to digitise and cater to shifting consumer demands.
- New South Wales, Victoria, and Queensland are the most sought-after states.
- More than half of the participants said they would choose another finance method if they could, with vendor financing being the most ideal alternative.
- Participants said the hardest aspects of raising finance are rising interest rates, lender approval and the length of the process.
- Buyers’ biggest concerns when purchasing a business are inaccurate valuations, undisclosed issues, and owner reliance.
If you would like to understand more about the best sources of finance to buy a business, you can read our loans to buy a business guide.