HOW BANKS FUND ACQUISITIONS
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HOW BANKS FUND ACQUISITIONS
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Banks fund business acquisitions across Australia every week, with or without property security behind the loan. The shape of the yes turns on one fork: whether there is Australian property equity available as security. Unsecured deals typically run to 50 to 70 percent of the purchase price as bank debt, against a buyer contribution of around 30 percent and a debt service coverage benchmark of 1.5 times.
Buyers ask me constantly whether a bank will fund a business acquisition, and just as often they do not ask at all, because they have already decided the answer is no. The assumption is that a bank will not lend against a business purchase unless the buyer pledges a house behind it, and plenty of genuinely fundable buyers put a good deal aside on that basis alone.
The assumption is wrong: banks fund business acquisitions across Australia every week, including deals with no property security anywhere in the structure, and the yes carries a defined shape once you understand what a lender is actually assessing.
I spent years structuring acquisition finance in banking before starting FGO, and I have structured this kind of deal repeatedly since. The buyers who get funded are consistently the ones who understand what the bank is assessing before they walk in the door.
The first question a lender effectively asks, ahead of anything else about the business, is whether there is Australian property equity available as security, yes or no. That single fork decides the shape of everything that follows: the rate, the loan term, the quantum available. It has never, in my experience, decided whether the answer is yes.
Is there Australian property equity behind the loan?
The loan leans on property equity behind it. Rates typically run around 6 to 7 percent, with terms stretching to 25 to 30 years rather than five to seven. A personal guarantee still applies, and the business case still has to stand up on its own.
This path is still fundable, typically 50 to 70 percent of the purchase price as bank debt, a minimum buyer contribution of around 30 percent, and the deal carried by the business's own cash flow rather than a house.
Both paths reach a fundable deal, and the fork only changes its shape.
Every acquisition deal I take to a lender is read against the same four factors, and I walk clients through all four before we go anywhere near a bank.
Who you are and why this business makes sense for you specifically.
Whether the business generates enough profit to service the debt comfortably, benchmarked at around 1.5 times cover, meaning the business earns roughly a dollar fifty for every dollar of annual debt repayment.
The fork above.
The equity you are putting in yourself, with a minimum contribution of around 30% when there is no property behind the loan.
One point trips up almost every buyer at this stage. A loan from the seller does not count toward that capital contribution. Lenders treat vendor finance as competing debt, not equity, so your own contribution still has to clear the lender's minimum on its own, a distinction I wrote about in the last piece in this series.
Take a $2,000,000 purchase price, a common size in the deals I see. At 50 to 70% leverage, that puts $1,000,000 to $1,400,000 of bank debt against the acquisition, with the balance built from the buyer's own contribution and, on most Australian acquisitions, a deferred or earnout component of around 10 to 20% of the price.
Before any of that debt gets approved, the lender runs the numbers the other way: does the business earn enough to service it, with room to spare, against a benchmark of 1.5 times cover. A business earning $300,000 in adjusted profit against a $1,500,000 loan over seven years at 10%, roughly $270,000 a year in repayments, comes in at about 1.11 times cover. Below the benchmark, and the loan as structured does not get approved; the fix is usually a smaller facility, a longer term, or both, worked out before the deal reaches a credit team.
The cost of assuming the answer is no is real. Buyers who make that assumption never build the case a bank needs to see, and they walk away from deals that were fundable from day one. Others go the other way and sign a structure, a secured seller loan being the most common, that quietly damages an otherwise bankable deal, because nobody flagged the wording before the heads of agreement was drafted.
The buyers who succeed treat the financing question as answerable early, well before the heads of agreement is signed.
In most of the acquisition deals I see, the one that gets funded is the one presented in a shape a credit team can approve. That shape is not obvious to most first-time buyers, which is exactly why the financing conversation belongs early.
I am happy to look at a target and a buyer's financial position before a solicitor drafts anything, and tell you honestly what the shape of a yes would need to look like, at no cost to you.
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