The most common question from first-time acquisition buyers is some version of: "I want to buy a business, but I don't have $500,000 sitting in cash. How does this actually work?"

The answer is that most SMB acquisitions are not funded with 100% equity. They are structured deals with multiple funding sources — and understanding how to stack those sources is the difference between being able to do a deal and not.

The three layers of acquisition finance

A typical SMB acquisition is funded from three sources:

Purchase Price = Bank Debt + Your Equity + Vendor Finance
         60%  +     30%    +     10%

Layer 1: Bank debt (50–65% of purchase price)

A commercial bank provides the primary debt facility. The bank cares about two things:

DSCR — Can the business repay the loan from its own earnings?
Security — What assets back the loan if it defaults?

Banks typically lend 50–65% LTV on an SMB acquisition. The higher the DSCR and the stronger the business, the more willing a lender is to extend to 65%.

At 8.5% over 7 years on a $300,000 loan (60% of a $500,000 business), annual repayments are approximately $59,000.

Layer 2: Your equity (25–40% of purchase price)

Your equity is your cash contribution. This comes from savings, superannuation (via SMSF in some structures), equity release from existing property, or investor capital.

How to reduce your equity requirement:

Negotiate the price down (reduces the whole stack)
Increase vendor finance (the seller takes a larger note)
Bring in a co-investor or silent partner for part of the equity tranche
Use an SMSF structure (where eligible and appropriate — get advice)

Layer 3: Vendor finance (5–20% of purchase price)

Vendor finance (seller financing) is when the seller agrees to receive part of the purchase price over time rather than all at settlement. This is common when:

The bank won't lend the full amount
There's a valuation gap between buyer and seller
The seller wants to demonstrate confidence in the business's earnings

A typical vendor note:

10–20% of purchase price
Repaid over 2–5 years
Interest rate 5–8%
Subordinated to bank debt

Why sellers agree to vendor finance:

It often unlocks a higher total sale price
Signals confidence in the business to the buyer
Provides ongoing income during retirement

Example deal structure

A business is priced at $600,000. Here's how the funding stacks:

| Source | Amount | Terms | |--------|--------|-------| | Bank debt | $360,000 (60%) | 8.5%, 7 years → $71,000/year | | Vendor finance | $60,000 (10%) | 6.5%, 3 years → $22,000/year | | Your equity | $180,000 (30%) | — |

Total annual debt service: $71,000 + $22,000 = $93,000

If the business earns $180,000: DSCR = 180,000 ÷ 93,000 = 1.94x — solid.

Without vendor finance, you'd need $240,000 equity (instead of $180,000) to maintain the same 60% bank LTV.

What if DSCR is too tight?

If the numbers don't work at the asking price, you have four levers:

1. Negotiate the price down

The most direct lever. A 10% price reduction on a $600,000 deal saves $60,000 in loan principal and reduces annual debt service by ~$12,000 — which can be the difference between a workable and unworkable DSCR.

2. Increase your equity contribution

Lower LTV = smaller loan = lower annual debt service = better DSCR. The trade-off is more of your own cash tied up in one asset.

3. Extend the loan term

Extending from 7 to 10 years reduces annual repayments. On a $360,000 loan at 8.5%, extending from 7 to 10 years reduces annual repayments from $71,000 to approximately $53,000 — a significant DSCR improvement.

4. Request more vendor finance

More vendor finance at a lower interest rate reduces the total debt service if the bank debt is expensive.

Using DSCR to guide price negotiations

The clean way to negotiate on financing viability is to anchor on DSCR:

"At the asking price of $600,000, using standard 60% LTV at 8.5% over 7 years, the DSCR is 1.1x against a minimum of 1.3x for this industry. To reach acceptable financing terms without increasing my equity beyond $200,000, the price needs to be $520,000."

This is a factual, financeable argument. It is much stronger than "I think it's worth less."

Lender requirements

Most commercial lenders will require:

3 years of business financials (tax returns + management accounts)
A business valuation (often required for loans above $500K)
Personal financials from the buyer
Full lease documentation
Evidence of DSCR above the minimum threshold (varies by lender and industry)

Some lenders specialise in SMB acquisition lending. A good commercial broker can identify the right lender for your specific deal and industry.

The BAS Tool financing model

BAS Tool uses default financing assumptions of 60% LTV, 8.5% interest, and 7-year term when calculating DSCR. These reflect typical mid-market acquisition loan conditions.

Admins can adjust these defaults to reflect current market rates. The Financing Feasibility dimension — weighted at 25% in the overall score — reflects how comfortably the business can service the debt under these assumptions.

If DSCR falls below the industry minimum, BAS Tool fires a red deal flag — the most serious alert in the system.

Running the numbers on a deal? Use the free BAS calculator to calculate DSCR and financing feasibility instantly. Also read what is a good DSCR for the full breakdown.

How to Finance a Small Business Acquisition Without a Huge Deposit