Second mortgage to fund a business acquisition

The situation

This is an anonymised composite reflecting a common pattern, not a specific settled deal. A business owner identifies an opportunity to acquire a complementary business, with a purchase price that requires more capital than their trading cash flow or a standard unsecured facility can cover. They hold meaningful equity in a commercial or residential property, currently financed by their existing bank at a rate they do not want to disturb.

Why it's hard

Refinancing the existing property loan to release equity would mean re-negotiating the whole facility with the bank, a slower process that could also mean losing favourable existing terms, and the acquisition timeline does not always allow for that. At the same time, the acquisition itself is too large for a typical unsecured facility to fund on its own.

How it can be structured

A second mortgage registered behind the existing bank facility releases the required equity without touching the underlying loan, subject to the first mortgagee's consent, sized against the property's value less the existing mortgage; the exit is typically the acquired business's cash flow servicing the second mortgage over its term, or a planned refinance once the combined position has stabilised. Where the acquisition amount is more modest, a caveat loan can achieve a similar outcome faster, if the timeline is tight enough that registering a full second mortgage is not practical before the acquisition needs to settle. In some cases, a portion of the purchase price is also funded through vendor finance from the seller, reducing the amount that needs to be raised against property and improving the overall structure.

The first mortgagee's consent process can vary considerably in speed depending on the lender, and borrowers should raise this with their existing bank as early as possible in the acquisition timeline, since some banks have a straightforward, well-worn process for consenting to a second mortgage while others treat every request as a fresh, individual assessment. Where the first mortgagee proves slow or reluctant to consent, a caveat loan can sometimes bridge the acquisition's completion date while the second mortgage consent process continues in parallel, with the caveat facility discharged once the second mortgage settles. Lenders writing the second mortgage will also want to understand the acquired business in some detail, not just the property security, since a business acquisition that subsequently underperforms affects the borrower's broader capacity to service both the second mortgage and their existing obligations. A clear integration plan for the acquired business, including what changes, if any, are planned to staffing, suppliers or operations, gives the lender a fuller picture of the acquisition's likely success beyond the historical financials alone.

What it typically costs

Pricing on a second mortgage reflects its subordinate ranking behind the first mortgage and the amount of equity available, quoted on enquiry once a lender has reviewed the property and the acquisition itself. An establishment fee is standard, and the facility is generally priced above the existing first mortgage rate but below an unsecured facility of equivalent size.

Timeline

1. Same day — scoping call confirming the property, existing mortgage and acquisition details.
2. 2–5 business days — valuation and deed of priority discussions with the existing mortgagee.
3. 5–10 business days — credit approval and offer.
4. 3–5 business days — settlement, timed to the acquisition's own completion date.

Questions we'd ask you

1. How much equity is available in the property once the existing mortgage is accounted for?
2. Has your existing lender been approached about consenting to a second mortgage or a deed of priority?
3. What does the acquired business's own cash flow look like, and can it help service the new facility?
4. Is any part of the purchase price being funded through vendor finance or an earn-out?
5. What is your timeline to complete the acquisition, and is it fixed or negotiable?

Related

Second mortgages · Unsecured business loans · Business owners · Deed of priority