Jonathan Jay explaining how you can buy business with no money.

How to Get Financing to Buy a Business: A Comprehensive Guide

If you have always dreamed of owning a small business but don’t have deep enough pockets to buy one or to found a start-up, that needn’t be the end of your entrepreneurial ambition. It’s possible to get financing to buy a business.

As with all financing, whether a personal loan to buy a car, the mortgage on your home, or anything else, different lenders have different appetites for what they perceive to be risk, and different eligibility criteria that borrowers are expected to meet. Being well informed and well prepared will give you the best chance of success when it comes to getting a business acquisition loan.

Understanding Financing for Business Acquisitions

Buying a business effectively gives you a leg up compared to starting a business from scratch. You can buy something that has proven concept and profitability, that already has staff, customers, suppliers and premises, and that provides profit, meaning you make money from day one.

Not everyone who is interested in buying a business has the financial resources to simply write a cheque for it – and those who do have the resources generally don’t do that anyway. That’s where business acquisition finance comes in. It facilitates business purchases and is an essential step in the journey to becoming a small business owner.

Finance secured for buying an established business will be paid back out of profits, over time. The amount available will depend on things like the condition of the business, the credit score of the buyer, and the available assets of either or both, that finance might be secured against.

And remember that finance isn’t forever; you might start out with a more expensive financial option because that is what’s available to you, but as the business proves itself, business owners have the option to renegotiate finance on better terms.

Traditional Financing Options to Buy a Business

Traditional financing options for buying an existing business include bank loans, unsecured business loans and commercial mortgages.

  • Bank loans: the traditional banks on the high street are often the first port of call for people seeking business finance. They will most likely offer the best interest rates and loan terms, but they can be inflexible when it comes to qualifying criteria. Those criteria might also be challenging to meet. If you have bad credit, for example, your loan application is likely to be rejected.
  • Unsecured loans: these might be potentially more accessible, but you can expect to pay higher fees and interest rates.
  • Commercial mortgages: if the business has a property attached and there is equity in that property, you might be able to get a mortgage that also funds the purchase of the business. Leveraging assets in this way can be a smart way to secure funding.

You can read more about these options in Funding to Buy a Business: Exploring Your Options. https://dealmakers.co.uk/funding-to-buy-a-business/

Non-Traditional Financing Options to Buy a Business

Non-traditional methods of financing a small business purchase include seller financing, crowdfunding, asset finance and invoice finance.

  • Seller financing: the current owner effectively supplies the business loan. The buyer generally makes a payment on completion of the deal and then pays back the balance in regular instalments, over time, just as with a regular loan.
  • Crowdfunding: with this, the buyer crowdfunds the purchase price and investors generally get a stake in the company and often preferential customer status too. Arguably one of the most successful, and well known, business crowdfunding initiatives was Brewdog’s Equity for Punks. (https://www.brewdog.com/uk/equity-for-punks) Investors received equity, discounts, and a free beer on their birthday.
  • Asset finance: if a business has assets, such as, for example, property, machinery or vehicles, they might be leveraged to secure business finance.
  • Invoice finance: a business with a high-value business-to-business debtor book – a good quality customer base with clients who pay their bills on time – might be able to use that to raise finance. Generally lenders will offer a percentage of the value of the invoices, and they might be selective about which invoices they will lend against.

You can read more about these options in Funding to Buy a Business: Exploring Your Options. https://dealmakers.co.uk/funding-to-buy-a-business/

I want to give you access to my complete Business Buying Toolkit so you can discover:

How Much Can I Borrow to Buy a Business?

The amount you can borrow depends on a variety of factors, including the type of business you want to buy, the type of financing you prefer, what the business is valued at, its financial history, and your own financial circumstances and track record.

An existing business with several years of financial records showing a trend of profitability, with assets, will be easier to borrow against than a business just about breaking even with a possibly shaky financial track record and dilapidated assets that need replacing. These kinds of things don’t just influence the yes or no decision lenders will make, they influence the amount they are prepared to advance.

It’s the same with your own record. If you have a solid credit history, a property with equity in it, and a regular income, you will be a good bet. If you already have a successful small business, that’s also helpful. But if your credit rating is spotty, you’re renting, or mortgaged to the hilt, and your income is irregular, lenders will take a different view.

Do I Need a Deposit?

If you are applying for a business loan, and especially a traditional loan, the answer is yes, they will want to see something upfront. Lenders typically want you to have some skin in the game.

Like a mortgage, you will rarely find a lender willing to put up one hundred per cent of the purchase price, and the percentage of the value they will lend will depend on a variety of factors. If you’re buying a business with seller financing, they are still likely to want some money on completion.

An exception would be where you have enough equity in the assets owned by the business to cover the full amount of the loan.

Say you are buying the commercial property the business operates from, you can expect to be able to acquire funding to around three-quarters of the full value. If there is currently a small mortgage outstanding – say around twenty-five per cent of the current value – and you borrow seventy-five per cent, you can use the surplus to buy the business and effectively do the deal without putting down a deposit.

That said, it is possible to buy an existing business with no money down and we’ve outlined some of those options in our article, How to Buy a Business with No Money: Strategies and Financing Options. https://dealmakers.co.uk/how-to-buy-a-business-with-no-money/

Preparing for a Business Loan Application

When you apply for a business loan, it’s essential you are prepared. You want to come across as professional, capable, and informed. The business loan application process and information required may differ from lender to lender, but as a general rule of thumb expect to be asked to supply information about the business, its financial history, its value your own credit history, financial standing and relevant experience, and your plans for the future. If the business operates in a specialist area, you might also need additional materials, like licences and permits.

You might want to enlist the help of an accountant and possibly a solicitor to help prepare what you need.

What Information Do I Have to Provide?

While requirements may differ from lender to lender, here is some of the information and documentation you would typically be asked to supply.

For the business:

  • Business bank statements
  • Financial statements, including balance sheets and cash flow statements, for the number of years specified
  • Financial forecasts
  • Tax returns
  • Details of assets that could be used as security for the loan
  • A business plan
  • Valuation information

For the buyer:

  • Personal bank statements
  • Proof of income
  • Personal tax returns
  • Details of personal debt
  • Details of assets that could be used as security for the loan
  • Information about relevant previous experience
  • Details of any other businesses owned either now or previously

You will also need to complete the lender’s loan application form.

What Do Lenders Consider?

Affordability is often the driver when it comes to making a decision as to whether to lend or not – the lender wants to be confident you can afford the repayments. Feeding into that are the kinds of things we’ve talked about so far, such as the financial health of the business, the assets it holds, the creditworthiness of the buyer – how they handle personal credit and credit cards, for example – and any assets they might own, which might be used to underpin a personal guarantee.

Ultimately, it all comes down to perceived risk. High street banks are strongly risk averse, whereas alternative lenders might be more flexible.

Which Lenders Offer Loans for Business Purchases?

The main banks and lenders all offer small business loans for business acquisition, as do alternative lenders, such as Boost Finance. It might be worth seeing what credit unions have to offer. Depending on the nature of the business, venture capital might be an option. Unsecured and secured business loans are likely to be available.

It might be worth consulting a specialist financial adviser to explore your loan options, as they could have access to lines of credit and funding options that aren’t available on the high street.

Conclusion

When you look for funding to buy your own business, take care to check out all the loan options available to you and to choose the best one for you. And remember, you don’t just need to get the purchase price into your bank account – you will also need funds to cover fees and you must make sure there is enough working capital in the business. You also need to be confident you can afford the monthly payments for your new business.

Need some help? Jonathan Jay has helped more than 3,000 people buy successful businesses and become acquisition entrepreneurs, and he has put together the most comprehensive FREE package of business buying resources available today. To get started on your acquisitions journey, download your FREE Business Buying Toolkit now.

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