If you are considering applying for a loan to buy a business, it is important to take all aspects into account – including both the advantages and disadvantages.
When purchasing an existing business, whether with or without a loan, there are several benefits to consider. With an established customer base and ongoing operations, it provides a unique opportunity to fast-track your entrepreneurial goals. However, you are also inheriting its market reputation and existing trade and supplier relationships.
One thing that really differentiates buying an existing business from starting one up from scratch is the significant capital involved. And that is exactly where a business loan comes in.
Should you consider a loan to buy a business?
In 2024, small and medium sized businesses collectively borrowed NZ$78,075 million. Why?
Because business loans provide accessible funding, allowing you to seize market opportunities when they arise. Not everyone can save enough capital to purchase a business outright, but a business loan serves as a financial bridge, enabling you to acquire a business with anticipated future cash flow and the support of ongoing, established operations.
Evaluating whether a loan to buy a business is right for you
What is the total cost of acquisition?
This question is perhaps the simplest and most obvious, but also most important. A close evaluation of the business cost, including the asking price and additional expenses like inventory and equipment, will help determine what you can afford and what may need to be covered by a loan.
What is your creditworthiness?
Stronger and better credit scores allow, in general, bigger loans and better terms. If your credit history is not strong, it may be beneficial to work on improving it before applying for a loan.
Do you have a business plan?
Business plans are not just for new enterprises. If you are looking to apply for a loan to buy a business, lenders may want to see a detailed strategy for turning a profit and sustaining its success. Plus, a business plan is helpful as it outlines your goals, estimated costs and profits, and clarifies your operational strategies.
Do you have the right documentation?
At ScotPac, we’ve made the process of applying for a loan to buy a business quicker, simpler and easier than ever. However, there are still some essential documents you will need, such as bank statements for the business you are purchasing. Contact our team today to find out what other documents you might need.
Advantages of a Loan for Buying a Business
Accessible funds
The most obvious advantage of a loan is that it provides an affordable way to secure the necessary funds to purchase a business. Without a loan, many promising entrepreneurs would not be able to capitalise on the opportunities presented to them.
Ongoing credit history opportunity
With flexible terms, a loan from ScotPac can provide business owners with the opportunity to build and improve their business credit history, unlocking future opportunities to grow and expand their business.
Tax benefits
There is an additional consideration here. While not always applicable, your interest payments on a business loan may be deductible from your taxable revenue and therefore provide financial benefit moving forward.
Retain equity
Aside from a business loan, you could raise the necessary funds to purchase a business by selling equity of that business. With a loan, however, you are able to retain full ownership and therefore full control of the business.
Disadvantages of a Loan for Buying a Business
Interest rates
Business loans may carry higher interest rates compared to other types of financing. Your credit score will play a role here, as will external market factors such as the cash rate.
Risk of default
The risk of default exists with any loan and can negatively impact your credit history. If this is a concern, reach out to ScotPac’s lending specialists today to find a custom finance solution that suits your needs.
Additional debt
A business loan is a form of debt and will be reflected as such on your balance sheet. While this is not necessarily a disadvantage, it is important to consider its impact on your business’s financial position.
Explore the Right Loan to Buy a Business with ScotPac NZ
Looking for the right loan to buy a business in NZ? Speak with the ScotPac team today.
We support over 8,500 businesses across NZ and Australia, backed by over 35 years of experience. That’s why we provide our clients with tailored, flexible solutions designed to meet their business needs.
If you’ve found a business you’re interested in purchasing and want to explore how a loan can facilitate the process, get in touch with us to discuss your financing options.
