Why do lenders require buyer equity for a business purchase?

Lenders ask buyers to put in their own money because the price of a business and the amount a lender can safely lend against it are different numbers. A lender sizes a loan to assets it can value and take security over, and a price usually includes more than that. The published rules of federal and Crown lenders show the logic, so this page uses them rather than quoting a percentage.

Loans are sized to what can be valued and secured

The Canada Small Business Financing Program’s guidelines say that in a going-concern purchase the agreement should allocate the price across the assets, so the lender can show that only eligible assets are financed. Goodwill is eligible only when it is part of a going-concern purchase, and buying shares is not eligible at all. Where an appraisal is required, for example when the seller is not at arm’s length from the buyer, the eligible cost is the lesser of the purchase cost and the appraised value. Any price above those limits has to come from somewhere else.

Seller financing is one layer, not a substitute

The same guidelines state that when a vendor finances part of the price, that amount is not eligible for a program loan. BDC describes a structure that can combine the buyer’s own investment, a business loan and seller financing, and says the required down payment depends on the transaction, the business’s financial health and the buyer’s situation. Seller financing therefore sits beside the buyer’s contribution instead of replacing it.

Why the buyer’s own stake matters to a lender

The federal program makes loans easier to obtain by sharing the risk with lenders, which means the lender still carries part of that risk. Put plainly, equity is the part of the price the buyer, not the lender, stands to lose first if the business underperforms. The guidelines also describe personal guarantees, and note that a borrower operating as a sole proprietorship or partnership is liable for the whole repayment. See how much cash a buyer needs for the budgeting side.

What to ask before you apply

• How much of the price the lender treats as eligible, and on whose valuation.
• Whether seller financing is accepted and how it ranks behind the loan.
• Which sources of the buyer’s contribution the lender will count.
• What security and personal guarantees the lender will require.