If you are looking to purchase a business, and haven’t got all the cash ready to transact you may need to consider sources of finance.
As a general rule, our advice is to understand how much you are able to borrow before you start your search for a new business, as it may change your outlook when you have a grasp of the total cash available.
In this guide, we will touch on the main forms of finance to acquire a business, along with tips and tricks to get the deal agreed.
Bank Loans
This is usually the first type of finance people think of when considering purchasing a business, and depending on the existing relationship with your bank, it could be a great way of raising funds. Your bank has an understanding of your track record and will take this into account when considering your application.
Typically banks contribute between 50% to 70% of the purchase price depending on a number of factors. One of the factors is whether the loan is secured or unsecured, along with your credit rating.
Put simply, you agree to a line of credit with the lender, who you agree to pay back on a set schedule, to which the loan accrues interest at the agreed rate.
Be sure to factor in the cost of borrowing against the cash flow of the business, so you have a good idea of what the business is likely to make after additional financing costs.
Secured Bank Loans
Providing security around a loan gives the lender confidence that you are likely to repay your debt, as you have the risk of them calling in the security if repayment terms are not met.
Typically, secured loans have lower interest rates and longer repayment terms, making them a preferred choice. Depending on the type of business, you could offer land, equipment, premises or stock as security.
Unsecured Bank Loans
Using an unsecured bank loan significantly increases the risk to the lender, and it is more likely that the interest rates will be much higher than that of a secured loan. Typically unsecured loans tend to be lower in value but can be relatively quick to obtain.
Your lender will almost certainly take into account your credit rating as a means of judging how likely you are to pay back the loan.
Commercial Mortgages
These are typically used when purchasing a commercial property at the same time as the business itself. Typically the lender will require a minimum of 30% deposit, depending on the strength of the business accounts and the business plan you are putting forward. The interest rate will reflect the risks associated with the business being acquired.
Deferred Consideration
Occasionally in small business sales, we do get occasions where offers are put forward with an element of the payment being deferred over a period of time after the initial upfront payment. This is known as deferred consideration, and if agreed with the vendor is a great way of structuring the deal.
Typically deferred consideration is secured using a debenture over the acquired limited company, or if it’s an asset sale a loan agreement, with the option of a personal guarantee.
Asset Based Lending
If you are purchasing a business with significant fixed assets, lenders can assess their value and raise funds against them in order to secure a loan. These funds can then be used to pay the vendor as part of the sale. Be aware of the repayments back from the business, and their effect on your profit and loss accounts and cash flow.
The process typically works by the asset company purchasing the assets from you at an agreed price and issuing a hire-purchase agreement in order for you to pay them back for the assets.
If the business you are purchasing sells to other businesses it is possible to use invoice finance to “sell” those payments in advance of the customer paying. This is a great way to finance working capital at any stage of a businesses lifecycle and using it to finance a purchase is no exception. Depending on the type of business you’re buying, you could get up to 90% of the invoice value to help you make the purchase.
Need some help in deciding what finance you will need?
We work with a network of potential lenders that our partners would be happy to assist you with. They will sit down with you, go through all of your options and lay out the best strategy for raising sufficient capital to acquire the business.
Drop me a line on 01858 469 469 or email me [email protected] and I will do my best to help you find the right finance for your business acquisition.
