Borrowing money to buy a business
Sometimes, you need to take a step back to get ahead. Taking out a loan to buy a new business is a big financial commitment, but the long-term reward could be far-reaching. And unless you’ve won the lottery or have strong financial backing, you’ll likely need to borrow the money to get you started.
A business loan can assist with finance when you want to buy a new business. There’s a lot to consider when applying for a business loan, but if you’re driven – and thrive on a challenge – buying a business could be a good option for you. We’ve outlined everything you need to think about before you borrow money to buy a business.
Buy or build your own?
There are huge advantages in buying a business rather than starting one from scratch. A bank is more likely to lend you a loan for an established business. There’s less risk involved because the business will probably have a customer base and existing reputation – which means far less work for you before you start generating an income. You may also inherit staff who are already trained in their roles, making for a seamless changeover.
Accept the risks
Although there is far less risk buying an already established business, there’s still risk. That’s the nature of business – so it’s best to accept that now. Familiarise yourself with risk, and have a contingency plan in place that accounts for all scenarios.
Do your research
Like with any loan, you need to do your homework – different lenders will have interest rates and lending terms which could affect your overall loan cost. While a one or two per cent difference in interest may seem insignificant now, that’s a huge amount of money long-term. Shop around, and make sure you find the best deal to suit your financial circumstances.
Aside from the loan, there are some business-related matters you need to get clear on before you jump in head-first.
Make sure you fully understand:
- • What’s included in the purchase. Your sale and purchase agreement should clearly outline exactly what it is you’re paying for. If it’s not on there, don’t assume it’s included – it’s always best to check first.
- • What the future looks like. If you know the business is generating great returns for its current owner, that’s a pretty good sign it should continue. But don’t take what the current owner tells you for granted – do your research to ensure the business is on a trajectory for success.
- • Who the competition is. Research the market you’re buying into – it might be hard to compete in a saturated environment, especially as a new business owner. How will you keep your customers from switching to a competitor?
Think big picture
It’s good to get excited about a business idea, but rushing to take out a huge loan, only to realise your plan isn’t viable, isn’t a smart move. Think about your situation and decide if a business loan is the best option for you. If it is, that’s great, but if you’re not overly confident in the business, it might be smarter to keep planning before you plunge.
Many successful businesses have started by taking out a business loan – it’s a normal thing to do. But it’s not suited to everyone, and you need to understand how it works before you commit.
Here are a few questions you’ll want to know the answers to:
- • Will this add value? You should never take out a loan just because you can. You need to think long-term. Is taking out a loan going to increase your return? If you’re not sure, you need to do some more thinking.
- • How much do I need? Consult your business plan to understand exactly how much you’ll need. There’s no point taking out a huge loan, only to find you don’t need it all but you’re still stung with huge interest.
- • What can the loan be used for? Not all loans are made equal and how they can be used will vary. Check this and make sure you’re covered to buy a business.
- • How much will this cost? Don’t forget to factor in the term length and how much interest will be accrued over time. Can you afford to comfortably pay this back?
- • Am I in a strong financial position? This will affect both your ability to secure a loan and your likelihood of paying the loan back fast – cutting out unnecessary interest. If you’re not sure how you’ll manage the loan, speak with an expert first before signing on the dotted line.
Understand the process
Applying for a loan can be a complex process, so you want to be fully prepared. When deciding whether to lend you money, the bank needs to know how you’ll pay it back. The business will act as security, so the bank will need to see that it’s viable – and generates wealth – before they loan the money to you.
That’s why you’ll need the following to apply for a business loan:
- • Evidence of the business’s financial performance and history prepared by a chartered accountant – such as a profit and loss statement and an assets and liabilities statement
- • A Business Sale and Purchase Agreement
- • A copy of the lease agreement if your business is going to operate out of commercial premises
Usually, banks will lend 50% maximum of either the value or purchase price of a business. If you require more than a 50% loan, you may be able to offer another asset as security. In this case, the bank may lend you up to 80% of this asset.
Borrowing for better returns in business
You have the potential to reap huge financial rewards when buying an already established business. It’ll give you a head start with loyal customers, a valid reputation and business practices set in place. Depending on your financial circumstances, a business loan can help you to achieve your goals.
At Global Finance, we can help you secure a business loan with home loan rates – and we know how best to set up your application so that it gets approved. We always negotiate with lenders so we can deliver you more money, at lower interest rates with the most favourable terms.
Ready to get started with a business loan? Talk to us today.
**These are general guidelines and are by no means a reflection of bank or lending policies