Buying an existing business can be an easier option than building one from the ground up given that it already has an operational record of accomplishment. If you’re thinking of buying an existing business, however, you may be wondering how you would raise the finance to make this type of purchase.
It is possible to get a loan to buy a business, whether you need to borrow the full purchase amount or can fund some of it yourself. You’ll need to consider which type of loan is most suitable in your circumstances, and then prepare the necessary documents and information for the lender to assess.
What do lenders require when you apply for a business purchase loan?
For a loan to buy a business, lenders will assess your personal creditworthiness. They’ll also need information on your income and any business history or experience that makes you a good prospect for running the new business.
If you’ve run a business before, lenders are likely to ask for the documentation relating to its finances and tax affairs. They’ll also look at the business you’re buying to establish whether it’s a sound proposition and worth the price you’re being asked to pay. You may be asked to provide accounts and records relating to the company you are looking to buy.
The information required when applying for a business purchase loan can include, but isn’t limited to:
- Personal credit history
- Proof of income
- Tax documentation
- Documents relating to any previous business ownership
- Valuation of the business you’re buying
- Business plan, including financial projections for several years ahead
Where can you get a loan to buy a business?
High street banks and alternative lenders offer loans to buy businesses, and these can be secured or unsecured. You’ll need to provide collateral for a secured loan but this route offers lower interest rates as the security provided to the lender reduces their risk.
You may also be eligible for an unsecured loan to buy the business but the rates are likely to be higher than with a secured business loan. Unsecured loans are relatively quick to access, however, if you want a transaction to complete as soon as possible.
As you’re buying an existing business you can present the information the lender needs, which should offer reassurance about the risk involved. A downside to getting a business purchase loan from a high street bank, however, is that it can be a lengthy application process.
To expedite the funding it’s a good idea to approach a firm of commercial finance brokers as they typically have access to the whole of the market and can quickly narrow down your best options.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
What is seller financing?
Sometimes the person selling a business is willing to offer seller financing to their purchaser as part of the deal. This doesn’t involve a third party lender but is a legally binding loan arrangement between the buyer and the seller.
A seller is more likely to offer this type of financing if you have previous experience of running a business in their industry, as this would make success more likely in the months and years to come and allow you to make all of the repayments as required.
Seller financing works by making an initial down payment and then regular fixed monthly repayments to the seller over an agreed term. If you cannot afford to repay at any stage the seller is legally entitled to reclaim ownership of the business.
For more information on getting a loan to buy a business, please get in touch with Selling My Business. We can offer you a free consultation to discuss your plans and provide the professional guidance on funding your business acquisition.