One thing is for sure:
If you’re looking to buy a business, you’re going to need a way to finance the transaction.
As a general rule, we recommend that buyers look to identify and research the financial options available to them before starting to view potential acquisitions.
We’d like to help you with that, so that you are more equipped to begin making serious enquiries into businesses.
In this guide, we will go through all the ways in which you can secure your finances in order to buy the business that is perfect for you.
Next, we will give you some tips on how to finance a business with bad credit.
Afterwards, we’ll tell you what you need to prepare when applying for a bank loan.
How to Finance a Business Purchase
There are numerous ways to fund your business acquisition, but bank loans, commercial mortgages, asset finance, and grants are the most popular methods.
Read on to find out more about each of these options.
Bank Loan to Buy a Business
Bank loans are a popular type of debt financing used to fund the purchase of a small business.
At Intelligent, approximately half of our buyers borrow money from their banks to finance their acquisition.
Bank loans operate on a simple premise:
You agree a loan amount with your lender, whom you pay back with interest over a fixed period.
Typically, banks will contribute 50-70% of the total purchase price, with the remaining balance expected to be made up in cash by the buyer.
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.
Unsecured Bank Loans
You do not provide any assets as security in an unsecured loan.
This gives you less risk, but increases the risk for the bank lender, so you might have to pay more interest and fees for borrowing.
You may also need to give the bank a personal guarantee, which means you- as the business owner- will become personally liable to repay the loan if your business fails to do so.
If you’re purchasing a business as a group, you will likely have to all provide a personal guarantee individually.
Unsecured bank loans are typically limited to a loan amount of £250,000.
They are relatively quick to obtain, with a process time of several weeks.
The exact terms of the unsecured loan will depend upon your individual situation.
However, a poor credit rating will likely make it difficult for you to be granted an unsecured loan.
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.
Most commercial mortgage lenders will require additional financial security.
Most people associate asset finance with the running of a business, rather than its purchase.
However, it can be a highly useful means of raising cash for a purchase that involves acquiring expensive assets, such as property freeholds, land, equipment, tools, and vehicles.
Common asset finance solutions on offer include hire purchase and lease arrangements.
Hire purchase solutions let you spread the cost of buying your business’s assets.
In comparison, lease agreements allow you to lease equipment that you might need to replace or update frequently.
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 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.
Local and regional grants are relatively easy and quick to apply for, and you can expect to receive a decision after 4-6 weeks.
National and European grants typically have a lengthy application process involving two stages, taking 2-12 months to receive.
We recommend dedicating a lot of time to researching the grants you will be eligible for.
This is because most are extremely competitive, have highly specific criteria, and strict rules over how you can spend the money.
There are many sources of grant funding, so we recommend browsing the internet and approaching your local chamber of commerce as a starting point.
Funding for Intelligent Members
If you’ve had an offer accepted on one of our businesses for sale, first of all: congratulations!
To assist you further, we have a network of potential lenders we’d be happy to refer you to.
Whether you are an experienced operator or a first-time business buyer, we’ll do our best to connect you with the right lenders to provide you with the best funding options to suit your situation.
How to Finance a Business with Bad Credit
Unfortunately, you will be quite limited with regards to the amount and variety of bank loans available if you have a bad credit score.
Bank lenders will usually prefer to give you a secured loan, rather than an unsecured loan, if you have a bad credit history.
This is because they are guaranteed that the loan amount will be repaid- either through regular instalments, or by taking ownership of your agreed assets.
You will also face higher interest rates and fees because of the risk you present to lenders.
Some banks might give you the option of a guarantor loan with lower interest rates.
This is a type of unsecured loan which allows you to nominate an individual or business to be liable for any missed payments.
The good news is that bank loans only make up a quarter of all funding available to small business buyers.
You should consider the following alternative funding options for businesses with bad credit:
- Peer-to-peer loans. Funding is given by hundreds of investors that are signed up to the lending platform, to whom you owe repayments. These usually have high interest rates.
- Credit unions. These lend money at an affordable rate to their members and are regulated by the Financial Conduct Authority. They will assess your income and savings to determine your eligibility and terms. A range of products are offered, including business loans, instalment loans, start-up loans, lines of credit, business credit cards, and bad credit commercial mortgages.
- Business credit cards. Often limited to £1,000 with high rates, but they help you avoid interest whilst improving your credit score (if you can fully meet all monthly repayments).
- Friends and family. A potentially tricky yet popular option, as your relatives are more likely to care about the business’s character and potential, rather than your credit score.
- Grants. It will take considerable time to find suitable grants, but this is an option worth investing some research time into.
How to Improve your Chance of Being Accepted for a Bank Loan/Finance
Be selective on which loans you apply for.
If you apply for many loans and get rejected, you will damage your credit score further.
Nonetheless, your personal credit score isn’t the only factor which will affect your chance of gaining a bank loan.
Lenders consider a range of ‘borrower qualifications’ when assessing your application.
- Business credit score. This report includes the business’s past and current relationships with vendors and lenders, payment history (credit lines, credit cards, business loans), as well as legal filings and judgements, such as bankruptcies.
- Business revenue. Lenders will favour businesses with high revenue.
- Cash flow. The consistency of cash flow in your business is important.
- Collateral. This is vital in obtaining a secured loan.
- Business length and experience. A well-established business and plenty of individual business experience will give lenders more peace of mind.
- Outstanding debt load. Greater existing debt presents more risk to lenders.
- Business industry. Some sectors offer more financial security than others.
How to Improve your Credit Rating
Whether you’ve already secured funding or you’re struggling to find finance that you’re eligible for, it’s wise to start taking steps towards improving your credit score.
That way, you’ll be ready for the next time you need to obtain funding.
There are lots of ways you can boost your credit rating, but making regular and on-time payments to the following is a good place to start:
- Personal credit card
- Business credit card
- Business loans
- Personal mortgage
- Business mortgage
- Car loans
- Utility bills
How to Prepare for Securing a Bank Loan
Securing a bank loan is not something to take lightly.
The purchase of your chosen business might depend on it and as such, you don’t want to leave anything to chance.
We recommend following the below steps in order to improve your chances of securing a bank loan for a business purchase.
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.
Prepare a Business Plan
Although you don't need to provide an exhaustive plan at this stage, you should cover the crucial details of why you are buying the business, how you will operate the business, and how you plan to grow the business.
We recommend following our 13-step guide on how to write a business plan, to ensure you’re covering all the required sections in enough detail.
Demonstrate Your Expertise
The lender will also expect you to prepare and present information about your personal credentials, business experience, skills, and financial past.
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.
Prepare your Cash Deposit
To really improve your chances of securing a bank loan, you should be planning to put down a payment of 15-50% of the agreed selling price for the business.
The exact proportion required for a deposit is dependent on your own circumstances and those of the business.
Submitting a cash deposit demonstrates your commitment to the opportunity and is more likely to give your lender confidence in the transaction.
The bank may also ask you for some added financial security, such as equity in your home.
Now you know all about the wide variety of funding options available to purchase your ideal business, regardless of your circumstances.
Haven’t found the perfect business for you yet?
Please take a look at the businesses we currently have available for sale by using the search bar below.