How is a business purchase financed, and what will the lender need?

The usual financing stack

Few buyers pay cash. A typical small-business purchase combines a cash contribution from the buyer, a term loan from a bank or credit union, sometimes supported by the Canada Small Business Financing Program for eligible assets, and a vendor take-back where the seller accepts part of the price over time. Each layer has its own paperwork and its own view of the others.

Lenders assess the business's cash flow, your experience and your equity. They will usually want the purchase agreement, three years of statements, your business plan and, for a franchise, the franchise agreement. Get a written commitment early; the financing condition in your agreement should match its timing.

What security the lender takes

Expect a general security agreement over all present and future assets of the purchasing corporation, registered by financing statement under the Personal Property Security Act so that it ranks ahead of later creditors. Lenders commonly require you to stand as personal guarantor, alongside a pledge of your shares, an assignment of insurance proceeds and, where the premises are leased, a landlord's acknowledgement that the lender may enter to remove its collateral.

Our job is to confirm that nothing registered by earlier creditors remains ahead of the lender, to deliver the corporate resolutions and certificates the lender asks for, and to register its security at the moment funds are advanced.

Vendor take-back notes

A vendor take-back is a loan from the seller, documented by a promissory note, usually with interest and a repayment schedule, and often secured by a general security agreement or a pledge of the shares you are buying. Sellers like it because it bridges a price gap; buyers like it because it keeps the seller interested in a smooth handover.

The bank will normally require the seller's security to be postponed and subordinated to its own, and may restrict payments on the note while its loan is outstanding. The purchase agreement should also say whether you can set off a warranty claim against payments due under the note.

Buying through a corporation

Most buyers purchase through a new Ontario corporation. It separates the business's debts from your personal assets, though standing as personal guarantor to the lender and landlord pierces that separation for those creditors. If you are buying with a partner, a shareholder agreement should be signed before closing, not after, covering decisions, contributions, what happens if one of you leaves and how the shares are valued.

The corporation, not you, signs the purchase agreement or takes an assignment of it, opens the bank account, registers for HST and payroll, and becomes the employer and the tenant.

Matching the conditions to the calendar

Financing condition dates, lease consent, franchisor approval and licence transfers all have to line up with the lender's own conditions, which almost always include landlord consent and, for a franchise, the franchisor's sign-off. A lender that cannot fund on the closing date because a consent letter arrived a week late is a common cause of delayed closings. We build the closing agenda backwards from the lender's requirements so that each piece is requested in time, and we keep the seller's lawyer informed of where the financing stands.