How to obtain finance to purchase a business

Our team at Dale Wood Business Sales is always keen to help buyers own their dream business, but finance is one of the most common obstacles to making this dream a reality.

We asked Darren McCormack from Mayfair Finance Australia how to successfully obtain bank finance for a business acquisition:

Can I use the equity in my property?

Assuming the business profits are sufficient to pay back the debt, you can use available equity in your home or investment property to support any business financing. This is certainly preferable for banks as it gives them a tangible asset that can be used to pay the debt should you default on repayments. Additionally, this will enable you to secure a much lower interest rate and a longer repayment term, which will improve your cash-flow.

Do I need a business budget?

A cash-flow projection, showing monthly sales and related expenses for a 12-month period, will generally be a minimum requirement for bank finance. These will be based on the historical business financials, potentially with subtle variations should the new owner be planning changes to wages or other expenses.

This document will also provide the business purchaser with a thorough understanding of the cash-flow cycle of the business and its level of profitability, and importantly will reveal if and when a working capital facility (i.e. overdraft) may be required.

Should I write a business plan?

A business plan is usually not mandatory, but it can be very valuable in supporting your finance application. It doesn’t need to be a 20 page document, as a 2 to 4 page business plan will often suffice, preferably outlining a SWOT analysis. This will be useful both for the banks and for the business purchaser to use as a blueprint once they have bought the business.

What are the banks asking for in relation to COVID-19?

It will be beneficial to have the following information prepared when applying for finance:

  • Has the business requested and obtained any loan repayment deferrals?
  • Has the business cashflow been affected by COVID-19?
  • If cashflow has not been affected, why not?
  • Does it make sense to proceed with the transaction in question, due to the current COVID-19 situation?

Are certain financiers more attuned to business lending than others?

The majors are open for business; however they are very cautious due to COVID-19 and have raised the bar on the complexity of supporting documentation required to support a finance transaction and the required level of due diligence.

What kind of rates are you seeing for acquisition of a business? Also, for a business overdraft?

The interest rates for business acquisition loans range from 3.5% to 6%, depending on the loan size, the security offered, and the overall strength of the financials and other data.

Business overdraft interest rates range from 3.8% to 14%, dependent on the security offered, the facility limit, and the financials etc.

What about future capital expenditure?

Assess whether the business has CapEx requirements over the next few months or years, as these will affect your cash flow. Review how much investment is needed, if any, and the anticipated time frame to improve physical assets such as property, technology, or equipment.

Are my transferable skills relevant?

A resume that outlines your employment history, including any management experience and relevant small business and financial management skills is often advantageous, as it will give lending managers greater confidence in your ability to steer the business to future financial success.

Can the government-backed SME business loan be used for a business acquisition?

Unfortunately not.

About Mayfair Finance Australia

Darren provides his quick opinion on raising the required finance to support your business purchase, and then engages 3-5 lenders (whilst maintaining confidentiality) to gauge the lenders’ appetite for supporting the business purchase. In 90% of cases, the services of Mayfair Finance Australia will be complimentary as the lenders provide brokerage commission to Mayfair, however Darren will discuss if an upfront fee for service is appropriate.

Darren can be contacted on 0428 030 200 or email darren@mayfairfa.com.au for further business finance advice.

Call Dale Wood Business Sales (08) 8334 0600 or email enquiries@dalewood.com.au for a confidential discussion on your business purchase, or sale, requirements.