Using a caveat loan to buy a business

Buying a business is usually a months-long process that comes down to a few frantic days. The contract is agreed, the due diligence is done, and then something slips: the bank needs another week, the vendor wants the deposit now, a partner’s funds are held up. A caveat loan secured against property you already own can hold the deal together.

Where does a caveat loan fit in a business purchase?

Stage	The problem	How a caveat loan helps	Typical exit
Deposit	Vendor wants a deposit to take the business off the market	Funds the deposit quickly	Main acquisition funding at completion
Completion	Bank or other funding isn’t ready on the completion date	Funds completion on time	Bank settlement when conditions are met
Stock and working capital at takeover	Stock adjustment or opening working capital higher than expected	Tops up for the first weeks	Trading income or a working-capital facility
Partner buyout	Deed requires payment by a fixed date	Meets the date	Refinance or long-term facility
Earn-out or deferred payment due	Instalment falls due before cash is available	Pays the instalment	Business cash flow or refinance

In each case, the caveat loan is a short-term bridge. It isn’t the long-term funding for the purchase.

Why can’t the business itself be the security?

A caveat is lodged on a land title. The business you’re buying — its goodwill, equipment, stock and contracts — is personal property, not land. Security over those assets is registered on the Personal Property Securities Register (PPSR), which AFSA describes as the register for security interests in personal property. That kind of finance exists, but it takes longer to arrange and usually supports less.

So a caveat loan uses property you already own — your home, an investment property, premises — or a guarantor’s property. See residential and commercial security.

Should speed ever skip due diligence?

No. A fast loan is only useful if the business is worth buying. business.gov.au’s guide to buying an existing business recommends:

• gathering as much information as you can before you sign, including financial records, operations and legal documents;
• reviewing three to five years of financial statements;
• working out the current value and growth potential, with professional valuations where needed;
• checking the business has all required licences and permits; and
• putting the agreement in a contract that sets out the final price and payment terms.

A caveat loan solves timing, not quality. Do the homework first.

Ready to check the funding side? The Feasibility Checker has a “buying a business” purpose, or share the deal with a specialist.

How should you plan the exit?

The exit for an acquisition caveat loan is usually one of:

1. The main acquisition lender’s funds, once its conditions are met.
2. A refinance of the security property, once the purchase is complete.
3. The sale of another asset, such as an investment property or your previous business.
4. Trading income from the acquired business — possible, but it’s the least certain exit, because you haven’t run the business yet.

If trading income is the only exit, borrow conservatively and choose a longer term. Better still, pair it with a second exit. More on this on our exit strategy page.

An illustrative example

Illustrative only.

A couple are buying a Canberra café for $420,000. They’re contributing $120,000 of savings, and a lender has approved $300,000 for the balance, but a condition about the lease assignment won’t be satisfied by the completion date, and the vendor won’t extend. Their home is worth about $1.1m with $350,000 owing. A $315,000 caveat loan including costs brings the combined LVR on the home to about 60% and funds completion alongside their savings, with a three-month term. Once the lease assignment is finalised, the approved lender settles and the caveat loan is repaid.

What about buying into or out of a partnership?

Buyouts often run to a fixed timetable in a shareholders’ agreement or partnership deed. Missing the date can reopen negotiations or trigger penalties. A caveat loan can meet the date while the remaining owner arranges long-term finance. If the property that will secure the loan is held by a trust or company, check trust or company property first.

What will the vendor and their advisers want to see?

Vendors want certainty. When your funding involves a short-term loan alongside a main lender, their conveyancer or lawyer may ask for:

• Evidence of funds for the deposit, which a caveat loan can provide quickly once documents are signed.
• The main lender’s approval and a realistic timetable for its conditions.
• Confirmation of the completion date and what happens if it moves.

Being able to show that the deposit and any gap are already covered can strengthen your position in negotiations. A vendor weighing two similar offers will often prefer the buyer whose money is lined up.

What are the common traps in an acquisition bridge?

• Relying on the business’s first months of trading to repay. New owners often find the first quarter tougher than the vendor’s figures suggested.
• Underestimating stock and working capital at takeover. Stock adjustments can add a meaningful amount at completion.
• Letting due diligence slip because the money is ready. Speed of funding should never shorten your checks.
• Leaving the lease to the last minute. A lease assignment the landlord hasn’t approved is one of the most common reasons completion slips.

Buying a business on a deadline? Let’s help you close

Tell us about the purchase, the funding already approved, what’s missing and by when.

Enquiring takes around 60 seconds and involves no credit check. Your details aren’t shared around a panel of lenders; a specialist reads them and calls you to talk through the gap. Please include the completion date and the exact shortfall — that’s what the plan is built around.

Close the gap on your purchase →