In Short
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Gather Essential Documentation: Prepare a comprehensive business plan, financial records, asset details, and personal identification to support your financing application.
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Choose the Right Lender: Evaluate traditional banks, vendors, or alternative lenders based on your financial situation and the business’s needs.
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Negotiate Financing Terms: Understand loan structures, interest rates, repayment schedules, and ensure legal agreements are clear and fair.
Tips for Businesses
Before purchasing a business, conduct thorough due diligence. Review financial records, understand valuation methods, and clarify purchase specifics. Engage professionals, such as lawyers and accountants, to identify potential risks and ensure a smooth transaction. LegalVision+7
Financing the purchase of a business can be tricky. You may have a number of financing options depending on your experience, assets and type of business. In most cases, you will need to have financing in place before you complete the business purchase. This article sets out what you need to do to get your financing in place. It covers:
- what documents and information you need to apply for finance;
- factors to consider when choosing your lender; and
- the important features of financing arrangements.
This factsheet is relevant if you seek debt financing (i.e. a loan) rather than equity financing (i.e. issuing shares in your business).
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Part 1: Information You Will Need to Apply for Financing
The information and documents you will need will vary depending on your lender and the type of loan. Below is a checklist of information and documents you will need for most loan applications. Even if you are not sure which lender you will engage, going through this checklist and collecting this information will help you to determine what type of lender will lend to you. It can also put you in a more informed position for negotiations.
What Documents Do You Need?
- A detailed business plan which includes financial projections, objectives, strategies, etc.
- Details of the assets that the company – or you personally – can offer as security (collateral). For example, your house, car, shares.
- The business’ previous financial accounts.
- Professional valuation of the business conducted by a certified accountant or valuer.
- Your identification documents.
- Proof of residency.
- Personal or company bank statements (depending on the nature of your business structure).
- A recent statement of assets and liabilities.
- Contact details of the seller or seller’s agent.
The most common type of financing seen in connection with a business purchase is vendor finance. This is when the vendor of the business lends you the purchase price. For vendor financing, you are not usually required to give as much information as you would to a traditional lender. There are a couple of reasons for this:
- the vendor already knows the details of the business, and
- they are not subject to the same laws as the banks.
Vendors generally need information about your current financial position (including your assets, other income streams and existing loans).
Part 2: Who is the Most Suitable Lender for You?
Depending on your financial position, the most suitable lender for you may be whomever is willing to loan you the money you need. You may not have many options, especially if you are using all your surplus cash to pay as much of the purchase price as possible. The table below sets out what type of lender and loan you may be able to access, depending on what type of borrower you are.
| What Type of Borrower Are You? | Type of Lender | Type of loan | Advantages | Disadvantages |
| You have significant assets. You have not granted security (e.g. have taken out a mortgage) over these assets. You have existing positive revenue streams. You do not have significant borrowings. | Bank | Traditional bank loan with regular principal and interest payments. | + Lower interest rate+ Some borrowers prefer borrowing from a reputable lender | + You may have to give security over some or all of your assets. + You may have to give a personal guarantee |
| Alternative lender | Similar to a traditional bank loan, but with higher interest rate | + May be available even if a traditional bank won’t lend to you | + Higher interest rate+ Less friendly terms | |
| Loans with friendly terms – manageable interest payments and/or deferred payments | Business vendor | This type of financing is similar to a traditional loan but typically has a higher interest rate. It may be structured as a deferred payment of the purchase price rather than a separate loan agreement. | + Easy application process+ Less documentation requirements | + Higher interest rate+ You may need to give guarantees and/or security over your assets |
| Family and friends | Loan with friendly terms – manageable interest payments and/or deferred payments | + Friendly terms | + May be onerous for family or friends by putting them in a precarious financial position |
Part 3: What Terms Will You Negotiate as Part of Your Financing Arrangement?
To prepare yourself for loan negotiations, you need to understand what the terms of your financing arrangement could mean for your business. These terms will be contained either in your Sale of Business Agreement (for vendor finance), Loan Agreement and/or security documents (either a General Security Agreement or Specific Security Agreement, depending on what type of security you are giving).
Your lender will generally provide the draft documents to you. However, it is better if you can ask a lawyer to draft them for you. Your lawyer can draft the documents so that they are more “borrower-friendly” and will put you in a stronger negotiating position.
Definition of Terms
| Term | Description | Questions to consider |
| Loan Amount (“Principal”) | The amount that the lender will lend to you. | What interest rate is the lender charging on the loan? Is the interest compound? |
| Interest and Interest rate | Interest will accrue (i.e. be calculated) on your loan amount. The interest rate is the rate used to calculate the amount of interest you owe. | When is interest payable? When is the principal loan amount repayable? Can you prepay the loan without a penalty? Can I afford to make both principal and interest repayments? |
| Repayments | You will be required to repay the loan amount and interest amounts either periodically (e.g. weekly/monthly/yearly), or at an agreed date. | Does your lender want security over any or all of your assets? What restrictions will be placed on dealing with those assets while security is in place? |
| Security (collateral) | If you grant your lender security over an asset you own, you give them certain legal rights over that asset. Those rights include the power, if you fail to repay the loan when it’s due, to take possession of the asset, sell the asset, and use the sale’s proceeds to repay the loan. | Does your lender want security over any or all of your assets? What restrictions will be placed on dealing with those assets while security is in place? |
| Guarantee | If you grant your lender security over an asset you own, you give them certain legal rights over that asset. Those rights include the power, if you fail to repay the loan when it’s due, to: take possession of the asset;sell the asset; anduse the sale’s proceeds to repay the loan. | Are you being asked to give a guarantee? When can the lender call on the guarantee? Does it first have to ask the borrower to pay? |
| Undertakings and covenants | If you give a personal guarantee to your lender, your lender may ask you personally to repay any amounts owed to it. Even if you have a separate company borrower, your personal assets will be at risk if you give a personal guarantee. | Is your lender placing any restrictions on the business until the loan is repaid (such as taking on further debt or granting security to other lenders)? |
| Default | You will have to promise to your lender to do and not do certain things until you have repaid the lender. | If you do not repay the lender on time, or you breach other obligations under your documents you may end up in default. If this happens, the whole loan may become immediately repayable, and your lender may be able to exercise its rights over any assets that it has security over (e.g. take those assets from you and sell them). |
Part 4: The Financing Process
Before approaching lenders, it’s crucial to establish a clear financing strategy that aligns with your long-term business objectives. This strategy should consider factors such as the desired capital structure, growth plans, and cash flow projections. By having a well-defined strategy, you can better evaluate the suitability of different financing options and negotiate terms that support your overall business goals.
Obtaining financing for a business purchase typically involves several key steps:
1. Explore Financing Options
Determine what type of borrower you are based on your financial position, assets and cash flows. This will help identify the most suitable lenders, as discussed in Part 2, whether banks, alternative lenders, business vendors, or personal sources.
2. Establishing a Financing Strategy
Before approaching lenders, it’s crucial to establish a clear financing strategy that aligns with your long-term business objectives. This strategy should consider factors such as the desired capital structure, growth plans, and cash flow projections. By having a well-defined strategy, you can better evaluate the suitability of different financing options and negotiate terms that support your overall business goals.
3. Prepare Your Financing Application
Gather all the required documents and information outlined in Part 1. This includes a detailed business plan, financial statements, valuation of the business, personal identification and proof of assets/liabilities. Having this documentation ready will strengthen your loan application.
4. Select and Apply to Lenders
Once you’ve narrowed down potential lenders, prepare applications and submit your documentation. Be prepared to go through the lender’s due diligence process, which may involve requests for additional information.
5. Review and Negotiate Terms
If approved, carefully review the proposed loan terms and securities/collateral required. Refer to the considerations outlined in Part 3. Don’t hesitate to negotiate terms with the help of a lawyer to ensure the arrangement is favorable for your business.
6. Acceptance and Close
After negotiating and agreeing to terms, you will formally accept the financing arrangement. You should ensure that all documentation is in order. Moreover, any required securities/collateral must be appropriately placed before receiving the funds.
Throughout this process, on top of lawyers, remember there are specialist finance brokers who can assist with structuring your application, identifying appropriate lenders and negotiating terms if needed.
Key Takeaways
Securing financing can be difficult if you decide to purchase a business. Depending on your lender and the type of loan, you will need to prepare a range of documents. You will need to select the most appropriate lender, which will depend on your financial position and needs. With the help of a business lawyer, you can then negotiate the terms of the loan.
If you need help with financing the purchase of a business, our experienced buying a business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1800 534 315 or visit our membership page.
Frequently Asked Questions
How do I choose the right lender for my business purchase?
Consider your financial situation and the business’s needs to evaluate traditional banks, vendors, or alternative lenders. Each has its advantages and requirements, so select one that aligns with your objectives and capabilities.
What terms should I negotiate in my financing arrangement?
Focus on loan structures, interest rates, repayment schedules, and ensure legal agreements are clear and fair. Understanding these terms will help you manage your financial obligations effectively.
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