How to Fund a Business Purchase

by Mark Collins 6th of December, 2024

How to Fund a Business Purchase

At some point in the cycle, you will likely need some funding if you want to get into your own business. Savvy business brokers will ask you upfront if you have finance sorted or if you require funding. Even if you are in the fortunate position to not need finance, the question is why you wouldn't be given in most cases the interest is tax-deductible, and you can keep a hold of some cash for those unforeseen business expenses.

So, let's dive into how you would look at finance for any type of business on the market.

First, I’ll cover franchises.

Most of the larger franchises will be accredited with the major banks for up to a certain percentage. What this means is if you were to purchase a greenfield site (i.e., something to start from scratch with no trading history) some banks may lend you up to 70% of the total cost without putting your house on the line.

You still need to come up with the 30% as either cash or equity but they have come up with these limits as what they consider to be maximums based on what that business model can support.

You don’t want more debt than the business can handle!

If you are purchasing an existing business that has a trading history the advantage you have is, you can compare relative cash flow to debt repayments. So do you need a deposit? Yes, the bank will still want you to put some hurt money in be that cash or equity.

The process really isn’t too different to purchasing a house. You still need some sort of deposit or equity in a property to purchase another home, same goes for a business but the equity can also be another business you own.

Pre-approvals don’t exist in business lending as most of the lending decision is based around the actual businesses ability to afford the debt repayments.

If you are not putting up a property as security for example then the lender will likely want the debt repaid over a very short period, say 1-5 years. If you are property-backed or are putting in a healthy deposit, then that timeframe can stretch out much further and in turn significantly reduce the outgoings in debt repayments each month.

If you are seriously wanting to purchase a business in the future, I’d still recommend chatting to a good finance broker first about how far you can stretch your cash or equity, what you can and can’t use as security, so you know the deals you are looking at are not a waste of time.

If you want to discuss your finances to buy a business, chat with Mark at Loan Market.

Tags: buying business owner small business tips