Financing your 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 purchase of the business. This factsheet sets out what do 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 are seeking debt financing (i.e. a loan) rather than equity financing (i.e. issuing shares in your business).

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.

If you are struggling to find financing options, or need some help putting together your loan application, there are specialist financing brokers that can help. These types of brokers work closely with traditional and alternative lenders and help new business owners find finance. If you need a referral to a specialist broker, please let us know.

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 your 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

You do not have many unsecured assets (i.e. assets that you haven't already granted security over to another lender). You have positive but not significant cash flow

Business vendor

May be similar to traditional loan, but with higher interest rate. The loan may be in the form of deferred payment of the purchase price.

+ 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.

Term

Description

Questions to consider

Loan Amount ("Principal")

The amount that the lender will lend to you.

How much do you need to finance your purchase?How much is the lender willing to lend to you?

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.

What interest rate is the lender charging on the loan?Is the interest compound?

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.

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?

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; anduse 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 you dealing with those assets whilst the security is in place?

Guarantee

If you give a personal guarantee to your lender, your lender may ask you personally to repay any amounts owing to it. Even if you have a separate company borrower, your personal assets will be at risk if you give a personal guarantee.

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

You will have to give promises to your lender to do and not do certain things until you have repaid the lender.

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

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 which it has security over (e.g. take those assets from you and sell them).

What events will trigger a default under the document?Are there any grace periods for you to try and remedy these events? What are the consequences of default?


Key Takeaways

If you have decided to purchase a business, securing financing can be difficult. 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.