How to Finance a Business Purchase

And there’s more. 

It’s also possible to negotiate deferred payment deals. 

This is when a buyer pays a lump sum on completion of the business sale, followed by monthly instalments thereafter. 

This is a very innovative way of funding where the business’s accounts are weaker. 

There are two types of bank loans – secured and unsecured. 

Regardless of the type that is best for you, it is important to remember that banks are more open to lending money to people who are buying a business with a successful trading history. 

This makes sense, because the banks want to know that their loaned money will be spent in a way that ensures a return for them. 

Nonetheless, the recent stream of government initiatives to boost small business lending and the general support they are receiving has increased the banks’ confidence to lend money to buyers. 

Secure Bank Loans

Secured loans require you to provide an asset that you allow the lender to take if you cannot maintain your repayments. 

This is known as giving the lender a ‘charge’ over your security. 

By providing the security of an asset, you are reducing the bank’s risk when giving you a loan. 

This means they will be more likely to grant your desired amount of funding.  

You will also likely benefit from lower interest rates and longer repayment terms. 

You might be wondering: 

“How much can I borrow?” 

Secured loans are usually used for larger loans worth more than £250,000. 

Your assets used for collateral must have a large enough value to meet the size of the loan you are applying for. 

Depending on your business, you could offer premises, land, equipment, tools, or a combination of assets. 

Secured bank loans can be time-consuming to obtain if you require property valuations and/or increased legal obligations. 

Commercial Mortgages

Commercial mortgages might be available if you are buying freehold and leasehold businesses in certain circumstances. 

For example, they can be used to purchase business premises, or as part of a wider finance bundle to buy an existing business. 

However, most lenders will request a minimum mortgage of £250,000. 

You can usually obtain a commercial mortgage worth close to 100% of the business’s selling price, and the typical value of a mortgage is 70% of the agreed purchase price. 

The terms of the loan will depend on the stability of the business, whilst the rates provided will be based upon the risk of the company. 

A business with a strong and well-established cash flow could be expected to pay the mortgage in 5-10 years, whereas a new or unstable business could only be given 1-3 years for repayment. 

This is significantly different to residential mortgages, whereby lenders use pre-set rates and terms. 

And remember; 

Most commercial mortgage lenders will require additional financial security. 

But that’s not all. 

If you already have an existing business, you might be able to make use of asset refinance to purchase a new business. 

This works by allowing the finance company to buy your asset/s from you for an agreed price, which therefore gives you a cash sum to put towards purchasing your new business. 

You will then buy the asset back from the finance company in the form of a new hire purchase agreement. 

This is beneficial as it allows you to continue using your assets as normal, before they fall under your ownership again at the end of the hire purchase agreement. 

Grants

Grants are allocated by a range of local, regional, national, and European sources. 

A wide variety of grants are also available through the Lottery, trusts, and foundations. 

Grants are extremely valuable sources of funding as they usually do not have to be repaid. 

However, most grants will only cover a maximum of 50% of the total purchase price and will require you to match the grant funding. 

This usually means you will require other types of finance. 

Do your Homework

Ensure that you are fully versed in the company’s accounts. 

You will need to have access to the company’s audited accounts for three years. 

These are vital for the bank lender to fully understand the business’s financial activity and viability. 

It gives them a much greater level of insight into a company’s finances compared to their bank statements alone. 

Before you apply for a loan, a crucial step in fully understanding your acquired business’s accounts is to undertake due diligence. 

This is a process performed by your accountant and solicitor. 

They will analyse the business’s finances and external factors to assess the value of the company and the amount of risk associated with it. 

You can read about the due diligence process in full detail via our dedicated guide. 

Demonstrate Your Expertise

The lender will also expect you to prepare and present information about your personal credentials, business experience, skills, and financial past. 

However; 

Don’t worry too much about direct experience in the same industry you are considering purchasing a business in. 

We sell many businesses to people who go on to have great success in a completely new industry. 

If you want to buy a business as part of a career or lifestyle change, don’t let any doubts about acquiring funding stop you on your path. 

The banks will be looking for people who can simply show that they have considered the transition period and how the business will be successful in the future. 

For example, consider which transferable skills you have from your previous personal and professional experience. 

Show the bank that you’ve got it all figured out on paper and you’ll have a strong chance at financing your small business purchase through a loan.