Loans to Buy a Business in Australia

Loans to buy a business fall into two groups. Unsecured loans rely on the cash flow of the business and the buyer's guarantee. They are quick, but most unsecured lenders cap limits at around $250,000 to $500,000, terms are short, commonly one to five years, and pricing sits well above property backed lending. Secured loans are backed by residential or commercial property, business assets or a mix. They carry longer terms and larger limits. Many purchases use both, with property equity funding the bulk of the price and a smaller cash flow facility covering the gap. The differences are set out in secured vs unsecured loans to buy a business.

Property security changes the numbers more than any other factor. Against residential property, business purpose lending commonly reaches 80% of the property's value, with terms of up to 30 years. Against commercial property, most lenders sit at 65% to 70%, with terms commonly 15 to 25 years. The loan is measured against the property and not the business, so a buyer with enough equity can borrow the full purchase price. The lender still tests whether the business and the borrower's other income can service the debt. The cost of failure is also higher, because the property is what the lender sells if the loan defaults.

Goodwill lending is a loan secured mainly by the business itself, through a general security agreement and director guarantees, without a property mortgage. Where it is offered, most lenders limit it to about 50% of the purchase price, and major banks rarely provide it outside their favoured industries. Appetite is strongest where income is recurring and the industry is regulated or professional: medical, dental and veterinary practices, accounting firms, pharmacies, childcare centres, rent rolls and accredited franchises. Specialist healthcare lenders can go well above 50%. Rent roll lending commonly sits at around 60% of the roll's value. Childcare is assessed on occupancy and licensed places, as the childcare business loan guide explains.

Assessment of the target starts with two to three years of financial statements and tax returns, plus current BAS and management accounts. The assessor normalises profit by adding back items that will not continue under the new owner, such as an above-market vendor salary, personal vehicle costs, one-off legal fees, interest and depreciation. A market wage for the working owner is then deducted. The result is maintainable earnings, often expressed as EBITDA. Lenders test whether those earnings cover the proposed repayments, commonly by at least 1.25 to 1.5 times, and check that revenue is not concentrated in one or two customers.

The buyer is assessed as closely as the business. Lenders want relevant industry experience, a clean credit history, a statement of personal assets and liabilities, and evidence of the deposit. Contributions commonly range from 20% with strong security in a favoured industry to 50% where the loan rests on goodwill alone. Where a company or trust is the borrower, the directors give personal guarantees. If a jointly owned home is offered as security, the co-owner must sign the mortgage, and a spouse who guarantees the debt is usually required to obtain independent legal advice first.

Vendor finance is where the seller leaves part of the price, commonly 10% to 30%, to be repaid over one to five years. Senior lenders usually require it to rank behind their loan and count the repayments in servicing. Earn-outs defer part of the price and tie it to future performance, which helps where buyer and vendor disagree on value. Franchise purchases add another layer. Lenders keep lists of accredited franchise systems they have already reviewed, and may fund 50% to 70% of the cost of an accredited franchise without property security. Non-accredited systems usually need property behind the loan, and the term is limited to the franchise agreement.

Timeframes depend on the lender and the security. A bank application with property and business valuations commonly takes four to eight weeks from submission to settlement. Non-bank lenders can be faster, and private lenders relying on property alone can settle within days, at a higher cost and for short terms. Finance clauses in sale contracts should reflect those timeframes. Goodwill loans are usually principal and interest over three to ten years with little or no interest-only period, so the business must carry real repayments from day one. More detail on each part of the process is in the buying a business help hub.