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How to finance buying a business

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Leanne Macardle

Freelance Contributor

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Many people harbour dreams of running their own business, but it isn’t always that simple to achieve. What if, instead of having to start from the ground up, you could take on an already established business and make it your own? Buying a business can be a great way to turn your dream into reality, so here’s everything you need to know about financing one.

Can I finance the purchase of a business?

Yes. In fact, unless you’ve got a huge amount of cash tucked away, chances are you’ll need some form of finance to get the transaction off the ground. Already established businesses can come with a significant price tag, but luckily there are several financing options for you to consider.

What are the funding options?

This will depend on the business you’ve got your eye on, but here are a few of the most common forms of business finance to consider.

Business loans

A business loan is often the first thing people think of when considering business finance, and with good reason: these loans can be ideal for purchasing an established business as not only will it already come with a realistic value, but it will have proven itself to be viable, and as such the lender will (hopefully) view it as less of a risky undertaking. Though bear in mind that you may still be expected to put up some form of deposit yourself.

You may be able to opt for a secured or unsecured loan, depending on your circumstances. Unsecured loans tend to be smaller and you may need to provide a personal guarantee in lieu of any security, while secured loans can be used to borrow larger sums of money and typically have lower interest rates. Everything will be decided on a case-by-case basis, including the rate and terms you’ll be offered, and fees can be negotiable as well.

Commercial mortgages

Commercial mortgages can be useful if you’ll need to buy business premises, and will often comprise part of a wider business finance package. You’ll be expected to provide a substantial deposit, however, with lenders rarely offering commercial mortgages above 80% loan-to-value (LTV). Yet this can depend on the business in question, as can the rates charged, so it’s important to do your research.

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Asset Finance

Asset finance is typically used to buy equipment, and may be an option if you’ll need to purchase additional assets that aren’t included in the business price. Another method could be to use business assets you already have as security for a loan, and in some cases you may even be able to use the assets of the business you’re looking to buy, though this is less common.

Alternative methods

There are some additional options to consider if the above don’t quite fit the bill, or if you’re unable to source funding through traditional means. This includes crowdfunding, peer-to-peer lending, equity funding, investors or business angels, or you may be tempted to restructure your personal finances to cover the cost of the purchase (such as taking on an additional mortgage, turning to stock market investments or borrowing from friends and family).

Yet these can all come with their own risks; if you’re thinking of going down one of these or indeed any other route, it’s worth speaking to a specialist adviser who can help you decide the method of funding that would work best for you.

How to prepare for buying a business

If you’ve got a funding method in mind, your next step will be approaching a lender – but there are a few things you’ll need to do to prepare.

1. Undertake due diligence.

Thoroughly auditing the finances of your potential new business – which will normally be completed by your accountant and/or solicitor – is an essential first step, as it assesses the financial viability of the company along with any risks, and it means you’ll have an accurate value of the business as well. Plus, it will go a long way to helping you prepare for step two

2. Get your business plan together

Much like if you’re looking to start a small business from scratch, you’ll need to show potential lenders a business plan so they can decide whether or not you can offer suitable security. Luckily, much of the information you’ll need to provide will have been gleaned via step one, but you’ll need additional details besides. For example, you’ll need to show at least three years’ worth of accounts along with asset and liability statements, payment history and cashflow projections, together with details of any long-standing relationships with vendors. You’ll also need to show why you want to buy the business and how you intend to operate it, and crucially, how the finance will be put to good use.

3. Prove your credit-worthiness

You’ll need to prove your own credit-worthiness too, which means your own credit score will come into it as well as that of the business you’re looking to buy. Your experience will also be key – if you’re completely new to the world of business and want to buy a multi-million pound company, you’ll probably find it more difficult to secure funding than if you had a track record of successfully running businesses in the past. That’s not to say that someone can’t make a career change out of buying a business; you may have transferable skills, for example, or have carefully studied the business in question so you know how to make it a success. It’s all about proving to the lender that their money is in good hands.

Can I fund a business with bad credit?

Yes, though you’ll likely be offered less favourable terms and higher interest rates, and a secured loan may be your only option – you’ll need to offer some form of collateral to offset the higher risk that the lender is taking on. Yet it could still be more difficult to secure suitable funding, with mainstream lenders often limiting themselves to borrowers (and businesses) with good credit scores. Seeking smaller, specialist business finance providers would therefore be your best bet, and you’d almost certainly benefit from speaking with a specialist business broker ahead of time.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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