Business acquisition loans: how buying an existing business gets funded

Buying an established business is usually a safer bet than starting one, and lenders tend to agree. A business acquisition loan funds that purchase, but the lender isn’t really lending against the business you’re buying. It’s lending against the seller’s proven trading record, your ability to keep that record going, and whatever security sits behind the deal if things go wrong.

That last part matters more than most buyers expect. This page explains what an acquisition loan pays for, how a lender reads a purchase, why property so often ends up doing the heavy lifting, and the mistakes that cause deals to fall over close to settlement.

What does a business acquisition loan actually pay for?

The sale price is only the headline. A typical purchase includes several pieces, and lenders view each one differently.

Part of the purchase	What it is	How lenders tend to view it
Goodwill	The value of the name, customers and future earnings	Hardest to lend against; nothing to repossess if it fails
Plant and equipment	Machines, vehicles, fixtures that come with the sale	Some resale value; can sometimes be financed separately
Stock	Inventory at settlement, usually valued on the day	Moderate; perishable or specialised stock counts for less
Settlement adjustments	Rent, council charges, staff entitlements and deposits apportioned between buyer and seller	Often forgotten in the budget
Working capital	Cash to pay wages and suppliers before the first customer payments land	Essential; underfunding this is a common cause of early trouble

If the purchase includes valuable equipment, it can sometimes be carved out and funded through equipment finance, which reduces the amount that has to be lent against goodwill. Everything else is usually funded by a single facility.

How do lenders assess a business purchase?

A lender assessing an acquisition is asking one question: will this business, in your hands, earn enough to repay the loan with room to spare? To answer it they look at four things.

The seller’s figures. The federal government’s buy an existing business guide suggests buyers review three to five years of records, including tax returns, profit and loss, balance sheets and sales records. Lenders want much the same, and they check that the tax returns, BAS and bank statements tell a consistent story. A business that looks profitable on a management spreadsheet but lodges modest tax returns will be assessed on the tax returns.

The lease. A café, workshop or clinic is often worth little without its site. Lenders want to see the landlord agree to assign the lease, or grant a new one, with enough term left to repay the loan.

You. Industry experience, management history and a plan for the first year all count. A buyer moving from a senior role in the same industry is a very different proposition from a first-time owner.

Your contribution. Cash, equity in property or a vendor finance arrangement all show the lender you have something at stake.

Why does property security change the deal?

Goodwill can disappear quickly. If a business fails, a lender can’t sell its reputation. That’s why unsecured lending for acquisitions, typically $5k to $500k and sized on turnover and bank statements, usually suits smaller purchases where the business has a clean, long trading history the buyer can show.

For larger deals, or where the figures are good but not spotless, property security changes the picture. Property-secured business loans from $20k to $5m, written as first mortgages, second mortgages or caveat loans over residential or commercial property, let the lender rely on the property rather than the goodwill. Many buyers use equity in their home through a second mortgage behind their existing bank loan, leaving the home loan untouched. If settlement is close and the deposit is due before longer-term funding is ready, bridging finance can cover the gap.

The secured or unsecured check gives a quick read on which side of that line your purchase is likely to fall. If you’d rather talk it through with someone, you can start an enquiry about funding your purchase and a real person will look at the numbers with you.

What due diligence helps the loan as well as the purchase?

Good due diligence protects you from a bad deal, and it also answers most of the questions a lender will ask. Business Queensland’s due diligence checklist recommends finishing your checks before signing, and seeking warranties and indemnities from the seller for issues such as unpaid wages or supplier disputes. A few checks are worth doing early because they directly affect funding:

• Search the PPSR. If equipment is included in the sale, a search of the Personal Property Securities Register shows whether anyone claims a security interest in it. Buying goods with money owing against them can mean losing them to the financier.
• Reconcile sales to deposits. Match the point-of-sale or invoicing totals with bank deposits for at least twelve months.
• Check the ATO position. Ask whether the business has tax debt or a payment plan. The debt usually stays with the seller’s entity, but it can reveal cash-flow stress that the profit figures hide.
• Confirm licences transfer. Liquor, health, transport and trade licences don’t always move with the business.
• Talk to the landlord. Get the assignment terms in writing before you commit.

Illustrative example

Illustrative example: an experienced mechanic wants to buy the suburban workshop where he’s worked for eight years. The asking price is $420k, including $90k of hoists and diagnostic gear. The workshop’s tax returns and BAS line up over three years, and the landlord is happy to grant a new five-year lease. He has $60k in savings and roughly $500k of equity in his home. The equipment is funded separately against the gear itself, and the balance plus a $40k working buffer is funded with a second mortgage over his home, sitting behind his existing home loan. His savings cover legal fees, the lease bond and the settlement adjustments. The lender’s comfort comes from three things: the trading history, his years on the tools in that exact business, and the property behind it.

What does an acquisition loan cost?

There’s no single price. The cost depends on the type of security, the size of the loan, the length of the term, the strength of the seller’s figures and your own credit history. Beyond the interest, expect an establishment fee, legal and settlement costs, and possibly a valuation of the security property. Ask for every fee in writing and compare the total cost over the term, not just the repayment.

What mistakes trip up business buyers?

• Borrowing only the sale price. Forgetting stock, adjustments and working capital is the most common error.
• Signing an unconditional contract too early. Make the purchase subject to finance and lease assignment.
• Relying on unverifiable add-backs. If you can’t prove it, the lender won’t count it.
• Ignoring the transition period. Customers sometimes follow the seller out the door. Agree on a handover period in the contract.
• Applying everywhere at once. Multiple applications leave multiple credit enquiries and rarely improve the outcome.

If you’re also buying out an existing co-owner rather than a whole business, the partner buyout loans page covers the differences.

Ready to see whether your purchase stacks up?

You’ve found the business, you’ve seen the figures and you know roughly what it will take. The next step is a short enquiry that takes about a minute and doesn’t trigger a credit check. Your details aren’t fired off to a long list of lenders hoping one bites; a real person reads your situation, works out which structure fits the purchase and calls you to talk it through. The more accurate your answers about the price, your contribution and any property you own, the more likely the first option we raise is the right one.

Check what’s possible for your purchase →