How lending works when buying a business
Acquiring an existing business can be a strategic pathway for Australian enterprises seeking growth, whether by purchasing a subsidiary or a competitor. However, many business owners may not have the immediate cash reserves to fund such significant acquisitions. This is where business lending becomes crucial, and navigating its complexities can be significantly streamlined with expert guidance.
What Banks Prioritise in Business Acquisition Loans
When evaluating a loan application for a business acquisition, banks meticulously assess several key areas to gauge the venture's viability and associated risks:
The People (Sponsors)
Banks focus on the individuals acquiring the business. They primarily seek to see that the buyers possess experience within the specific industry. While not an absolute prerequisite, demonstrable transferable skills from other industries can be acceptable if effectively presented.
Statement of Position
While a property-backed loan is preferred by banks, it's not always a strict requirement. Banks evaluate the client's assets versus liabilities. If the client demonstrates a strong statement of position and the target business itself boasts a decent balance sheet with tangible assets, unsecured lending can be a viable option.
Servicing Capacity
It is paramount for the bank to be confident that the borrower can repay the loan. This assessment goes beyond the actual interest rate (typically 6.5-7.5% on a secured business loan). Banks apply a considerable buffer, often 3-4%, on top of this rate when calculating repayment capacity. Borrowers must demonstrate they can afford the loan based on these buffered rates and the bank's internal policies and metrics.. This usually involves presenting the historical financials of the business being acquired to prove its capacity to afford the loan.
The Broker's Indispensable Role
An experienced broker goes far beyond merely finding the best loan price for a business acquisition. Their role is multi-faceted and strategic:
Thorough Due Diligence and Risk Mitigation
A broker will diligently review crucial documents such as franchise agreements and lease agreements. The objective is not just to identify positives but, critically, to uncover and proactively mitigate risks.
Crafting the Credit Memorandum
This is a formal document presented to the bank that comprehensively outlines the acquisition story. It typically includes:
Background: A detailed description of the client's experience and their capability to manage the business, often drawing from résumés and CVs.
Financial Metrics: An in-depth analysis of the business's financial performance.
Risks and Mitigants: Clearly outlining identified risks and how they will be addressed.
Belief in the Client
To unequivocally support a client to the bank, the broker must personally believe that the client can successfully operate the business. This conviction translates directly into the strength of the credit memorandum and the bank's perception.
Banking Appetite in the Current Economic Climate
Despite prevailing economic uncertainties, including post-COVID inflation, banks are generally "hungry to do business". However, their appetite can vary depending on the industry:
Cautious Industries: Sectors such as retail, hospitality, and construction currently face a deeper level of scrutiny from banks. While deals are still being executed in these areas (e.g., the franchised restaurant example), the accompanying narrative and financials must be exceptionally robust.
Deeper Scrutiny: For the construction industry, banks may delve into details like completed projects, the builder's CV, the number of ongoing projects, and the balance sheets of multiple entities.
Banks are not outright rejecting these industries but are undertaking more thorough examinations and posing more in-depth questions. Crucially, good operators will continue to secure backing from financial institutions.
Advice for Small Businesses Looking to Acquire
For small businesses contemplating a business acquisition through lending , the right strategy can turn an ambitious goal into a sustainable growth opportunity.
Early Planning and Communication
Do not delay until an opportunity arises quickly. Instead, communicate your intention to purchase a business within the financial year to your accountant and a broker at an early stage. This proactive engagement allows for preliminary discussions about your borrowing power, potentially based on your existing business's financials, even before factoring in the target business's performance. This early financial structuring can sometimes enable a stronger, potentially cash, offer once due diligence is complete.
"Skin in the Game" (Equity)
Banks generally prefer to see clients invest some cash or equity into the purchase. This "skin in the game" demonstrates commitment and financial stability. While securing funding without any cash injection is not impossible, it significantly complicates the process.
By understanding the bank's expectations, leveraging the comprehensive expertise of a dedicated broker, and engaging in early strategic financial planning, Australian businesses can significantly enhance their prospects of successfully acquiring their next venture through lending.
Ready to explore your business acquisition opportunities?
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