Bank Lending Criteria Checklist: Buying a Business in Australia (Free Download)

Bank Lending Criteria Checklist: Buying a Business in Australia

Work through each section before approaching a lender. Items marked with ★ are commonly cited as reasons for declining applications.

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Section 1: Your Personal Financial Position

Banks assess you as a borrower before they assess the business. Get these in order first.

• ★ Credit report checked. Pull your own credit report from Equifax or Experian before any lender does. Resolve any errors or defaults. Avoid multiple credit applications in quick succession — each one leaves an inquiry on your record.
• Income documentation ready. Two years of personal tax returns and notices of assessment from the ATO. If you're employed, recent payslips (last 3 months). If self-employed, the same tax returns plus business financials.
• Personal balance sheet prepared. List of all personal assets (property, savings, investments, superannuation) and liabilities (mortgage, personal loans, credit card limits). Banks use credit card limits, not balances, when calculating liabilities.
• ★ Deposit / equity confirmed. Most banks require 20–30% of the purchase price from your own funds (not borrowed money). For a $500,000 acquisition, that's $100,000–$150,000 minimum in demonstrable equity. Know your number before you start.
• Liquid assets documented. Three to six months of bank statements showing genuine savings, not a recent cash injection from a family loan. "Gifted" deposits are treated differently from savings.
• Existing debts listed. Mortgage repayments, car loans, HECS/HELP debt, other business loans. Be accurate — banks will find them all anyway.
• ABN held (if applicable). If you plan to operate under a new ABN, confirm the structure (sole trader, company, trust) with your accountant before applying. Some lenders have preferences.

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Section 2: The Target Business — Financial Documentation

Banks will want to see this for the business you're buying. Gather it during due diligence.

• ★ Profit and loss statements — 3 years. Prepared by a registered accountant, not a spreadsheet the owner made. Banks want formal financial statements.
• ★ Tax returns — 3 years. ATO income tax returns lodged for the business, cross-referenced with the P&L. Any material difference between the P&L profit and the taxable income will require explanation.
• BAS (Business Activity Statements) — 2 years. Quarterly or monthly GST lodgements. Banks use these to verify revenue independently of the P&L. (If the BAS revenue doesn't match the P&L, that's a problem.)
• Bank statements — 12 months. All accounts used by the business. Banks may request this directly during assessment.
• ★ Normalised EBITDA figure with add-back schedule. If you're adding back owner's salary, personal expenses, or one-off costs, have a documented schedule your accountant has signed off on. Banks apply their own scepticism to add-backs — a formal schedule helps.
• Current debtors and creditors. Aged debtors report and aged creditors report. Banks want to see that the business collects its debts promptly and doesn't have outstanding payables that will land on your desk on day one.
• ATO standing confirmed. Written confirmation (or accountant's letter) that there is no outstanding ATO debt, no payment plans, and superannuation is paid to date. Banks won't lend against a business with an ATO liability — and if you buy one, you may inherit personal liability as a director.

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Section 3: Serviceability Assessment

This is the number that determines whether you're approved. Understand it before you apply.

• ★ Debt Service Coverage Ratio (DSCR) calculated. Take the normalised EBITDA of the business. Divide by your estimated annual loan repayment (principal + interest). If the result is below 1.25, most banks will decline or require a larger deposit. Banks also add a buffer rate — typically 2–3% above the actual interest rate — when calculating serviceability.
• Add loan repayments to personal expenses. Banks will stress-test your combined household income against combined household expenses plus business loan repayments. Use conservative living expense estimates — banks apply the Henderson Poverty Index or their own benchmarks if your stated expenses seem low.
• Confirm salary structure post-acquisition. If the business will pay you a salary, what is it? Banks want to know you can sustain personal expenses without stripping the business of working capital. Have a clear plan.
• Working capital buffer identified. How much cash will remain in the business (or be injected) after settlement? Banks are wary of acquisitions that leave no operating buffer. A typical requirement is 1–2 months of operating expenses held in reserve.

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Section 4: Security

Most banks require security beyond the business itself.

• ★ Residential property available as security. Banks typically require a registered mortgage over residential real estate. The property's equity must be sufficient — calculate the combined LVR (loan-to-value ratio) across your existing mortgage and the new loan.
• Business assets listed. Plant and equipment, vehicles, commercial property if any. Banks may take a charge over business assets as additional security, but rarely as primary security.
• Personal guarantees understood. If buying through a company or trust, the bank will almost certainly require personal guarantees from the directors/trustees. Understand exactly what you're guaranteeing — typically the full loan balance — and get legal advice before signing.
• Security over business itself. Some lenders will take a General Security Agreement (GSA) over the business's assets. This is secondary to residential property but worth confirming with your broker or solicitor.

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Section 5: Deal Structure

How the deal is structured materially affects what the bank will lend.

• Purchase price breakdown prepared. Goodwill versus tangible assets versus stock. Banks lend more readily against tangible assets than goodwill (which they can't easily sell). If the purchase price is mostly goodwill, expect a lower LVR.
• Vendor finance component considered. If the seller is providing 20–30% as vendor finance (a subordinated loan), this can substitute for part of your deposit and improve bank serviceability. Banks have varying attitudes to vendor finance — confirm with your broker. See the guide to vendor finance for structuring guidance.
• Earn-out clauses reviewed with lender. If the deal includes an earn-out, ensure your finance broker knows the structure. Earn-outs can affect how banks view the total debt obligation. See the guide to earn-out agreements for detail.
• Acquisition legal structure confirmed. Are you buying shares or assets? Banks sometimes have preferences — an asset purchase gives cleaner security; a share purchase can complicate the security arrangement. Confirm with both your solicitor and lender.
• Independent business valuation (if required). Some banks require a formal business valuation from a registered business valuer. This costs $2,000–$5,000 and is separate from the accountant's report. Ask your lender early whether they'll require one.

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Section 6: The Application Package

What to prepare before you sit down with the bank or broker.

• Finance broker engaged. A broker with specific experience in business acquisition lending (not just residential mortgages) is worth using. They know which lenders are active in the space, which have better criteria for your industry, and how to present the application. Ask whether they have done business acquisition deals — many residential brokers haven't.
• Information memorandum obtained. The vendor's information memorandum or broker pack. Banks will want to see this.
• Heads of agreement or LOI signed. Banks typically won't do a full credit assessment without a signed letter of intent or heads of agreement. Use the LOI template if you don't have one.
• Business plan prepared. A one-page plan covering: what the business does, why you are buying it, how you plan to operate and grow it, and how the loan will be repaid. Banks won't fund a dream — they'll fund a plan that makes economic sense.
• References and industry experience documented. If you have relevant industry experience (trades background, operational experience, prior business ownership), document it. This isn't always required but it helps with borderline applications.

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Common Reasons Banks Decline Business Acquisition Loans

• Business has less than 2 years of trading history
• Normalised profit relies on large, unverified add-backs
• No residential property to secure the loan
• DSCR below 1.25 at the bank's assessment rate
• Credit impairment on the buyer's personal record
• Outstanding ATO debt on the business
• Purchase price predominantly goodwill with minimal tangible assets
• Buyer has no relevant industry or management experience
• Working capital insufficient after settlement

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For broader deal structure options — including when bank finance is the wrong tool — Module 6 of the Playbook covers vendor finance, equity structures, and hybrid approaches in detail.