Buying a Business or Franchise: How to tell which loan is right for your business?

Buying a Business or Franchise: How to tell which loan is right for your business?

Published on 2021-11-12

Category: Business Growth

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Starting your very own business can be a tough hill to climb.Between building up a sustainable set of consumers, new product innovation, scaling up production and managing other costs, it demands a lot of resources and time.

Purchasing an existing establishment on the other hand is an alternative to this difficult process. You would have an existing customer base at your disposal, with a pre-set method of systems, standardised equipment, and facilities all while getting to be your own boss and having a say in business functions.

If you do want to secure loans for existing businesses there are a couple of things you might want to consider.

Can I finance the purchase of a business?

 In order to answer this all-important question, there are a few parameters to consider:

1) What kind of business are you aiming to acquire? Is it a competitor? Or are you buying a firm to expand your existing business functions?


2) Are you a novice or a veteran? Are you new to the industry you’re angling to purchase, or do you have experience running an established business?


3)Do you have a strategy to finance the purchase of the business? Will friends, family, investors aid the purchase? Do you plan to go to a bank or alternative lender instead?


4) Do you own a home? Or a piece of commercial real estate that you could potentially use as collateral? Or are you planning to have no security when you apply for a loan? 

After you have answered the questions above, also ask yourself -why is the vendor selling now? Are you being sold the business in full or are you being offered a part of it? How much say do you have in this partly owned business agreement? You can finally begin start applying for your business loan.

Can I apply for a business loan to buy a business?

If you need funds to acquire an existing business then getting a loan is the way to go. Before you apply for a loan, make sure you have the following in order:

1)The amount required: Make sure you have an accurate assessment of the funds you would need to purchase and remember to account for the transition that would come later. If you avail too little capital, then the new business operations will be difficult and obtaining a second line of credit to the under estimation might force you to pay higher rates of interest. With an overestimation on the other hand, you might find yourself paying interest on finance you don’t need. So, make sure the required loan amount you come up with is accurate enough for business purchase, expansion and early transition alone.

2)The business plan: The lender needs a clear insight into your reasons for applying for a loan, how you might use the loan amount, ways you can afford the repayment of the sum borrowed and finally, how your business will turn a profit. Ensure these approximations of costs, profits, earnings projections and, plans of revenue and business expansion are as realistic as possible.


3)The repayment deadline: You should have deadlines for time you would need to pay off the loan. These repayments are scheduled weekly, fortnightly, or monthly andmight be a fixed amount or steadily increase as the business expands and incurs profit.


How much money can I borrow to buy a business?

You can borrow anywhere between $5,000 to $500,000 in unsecured funding to buy a business. The amount of loan approved will depend on your business turnover, the duration of the business, past repayments and a few other factors decided by the lender. Repayments are usually done on a weekly or fortnightly basis and the tenure is usually between a year to 3 years.

Which type of loan is best to buy a business?

There are four main types of loans, namely, business finance, secured business loans, peer to peer lender and unsecured business loans.

Unsecured Business Loans:
Unsecured loans are one of the most popular loans for small businesses in Australia, owing to the nature of the loan. These types of loans do not require any assets or guarantee, and hencegives business owers the flexibility to borrow money for cash flow, working capital or other similar needs. When buying another business to expand or grow their business, most business owners prefer this loan for their ease of access to funds. You would have to pay a higher rates of interest on an unsecured loan compared to a secured one.

Secured Business Loans:
Secured loans are loans where you will have to offer a collateral or security against the funds you secure. Lenders have a definite criteria that grants you the funds required to make the purchase. Due to the stringent nature of these criteria, it can take long before you get approved. The lending provider will scrutinise your business plan, the current financial health of the business you would like to purchase and examine the industry, consumers and projected profits.

Invoice Finance or Asset Finance:
If the business you desire to purchase owns assets of note, you can borrow against the value of those assets. Invoice finance can unlock cash in the debtors ledger and equipment finance will help you tap into 100% of the value of your new equipment and machinery assets. Asset financing don’t normally follow the stringent lending criteria of the traditional banks. With greater flexibility in the matter, you can seal in the required finance a lot quicker.

Peer to Peer Lenders:
Your lender can be a venture capitalist or an everyday Joe who wishes to invest their money in a business. Peer to peer lending platforms pair lenders with the right borrowers who are in need of finance. The sum borrowed constitutes smaller amounts from multiple sources and borrowers will have to pay full interest over a fixed period, much like a traditional bank loan.

Buying, then running a new business takes a lot of courage, entrepreneurial aptitude, skill and imagination. We here at Capital Boost believe that finances, or specifically the lack of finance should not stop you from realising your business plans. We help budding and established entrepreneurs look for schemes that suit them best and help them make the most out of their business loans.

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You are just one step away from securing the right loan to grow your business.

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