Using Seller Financing, Debt Finance and Non-Debt Finance to buy a business
There are various options available to you if you’re trying to raise finance to buy a business. The best funding method depends on your individual financial circumstances, however, as well as the type of business you’re buying.
You can use debt finance, such as a commercial mortgage or a bank loan, or equity finance whereby you attract investment by selling equity or shares to venture capitalists or equity investors. Seller finance may also be an option.
Secured and unsecured loans
Offering a hard asset as security on a loan means the lender takes a ‘charge’ on that asset, and has the right to sell it should you be unable to repay the loan. Secured loans reduce the risk for lenders, and as a result, typically attract lower interest rates and more favourable terms.
Unsecured loans are generally more expensive for the borrower, and as they’re riskier for the lender you may be required to provide a personal guarantee. This would cover some or all of the amount outstanding if you were unable to keep up with repayments.
A commercial mortgage can be used to fund the purchase of business premises, or an existing business as a whole. Mortgage terms will depend on the history of the business – its sales and cash flow – and the risk as perceived by the lender. A mortgage loan is secured on the property, which can be repossessed if the business fails.
Equity finance means selling a stake in your company to an individual, or perhaps a group of individuals. The difference between this and debt finance is that there’s no interest or repayments needed by a specified time, but you do lose ownership of a proportion of the business.
This type of funding is repaid over time following natural business growth and the payment of dividends, and because of this, an equity investor may demand a higher stake in the business.
If the business you’re purchasing is well-established and has a strong track record of sales and positive cash flow, it may be of interest to venture capitalists that provide finance for business purchase or growth.
Venture capitalists are usually set up as companies, and non-financial support may also be available whereby business experience or industry insight is offered to you as the new business owner.
Equity-based crowdfunding involves individual investors helping you to finance the business purchase. Online crowdfunding platforms are used to present your bid for investment, providing details of the business and why interested parties may wish to make an investment. Investors are offered a stake in the business, and return on their investment depends on whether the business grows in the future.
What is seller financing?
If you find a business that you wish to purchase, seller finance may be offered to facilitate a smooth sale. This type of finance is similar in nature to a bank loan - it involves repaying fixed amounts over a specified term with all conditions laid out in a legally binding agreement.
You’ll typically make a down payment on the purchase of the business, and repay the remainder over time. This type of funding a business purchase may attract higher interest rates, however, given the risk being taken on by the seller.
Selling My Business can provide more information on raising finance to buy a business, tailoring our advice to your own specific circumstances. We have more than 30 years’ experiencing of facilitating smooth transactions between buyers and sellers, and can offer reliable professional insight and advice, contact a member of the Selling My Business team