Table: sorted by loan terms, promoted deals first
If you fancy running your own business, you don’t necessarily have to start from scratch. If you’ve spotted an existing business up for sale in a sector that you have experience in, buying it could enable you to work for yourself without the risks of running a startup.
However, the big drawback is that you’ll need to find the funds to help you cover the cost of the purchase. If you don’t have enough in personal savings, you’ll likely need to borrow money through a loan.
A business acquisition loan is simply a loan designed to help entrepreneurs buy another business or buy out the owners and stakeholders of a business they already work at.
Business acquisition loans can refer to different borrowing types, whether that’s a term loan, asset financing or mezzanine finance.
There are a number of different types of business loans to consider. These are outlined below:
With a secured loan, you need to provide an asset, such as property, as security against the loan. This means your lender can repossess that asset and sell it to recoup its money if you are unable to repay the loan. Because this type of loan is less risky for the lender, interest rates can be lower. Borrowing amounts are usually higher too, and loan terms are longer.
You’ll typically find it easier to get accepted for a secured loan, even if you don’t have the best credit history.
An unsecured loan doesn’t require you to secure it against an asset, making it less risky for the borrower. However, borrowing amounts tend to be lower compared to secured loans and loan terms are often shorter. Because unsecured loans are riskier for the lender, interest rates are usually higher too.
Be aware that in some cases, you might be required to sign a personal guarantee. This is a legal agreement that means you, as the business owner, are personally liable for the loan repayments if the business cannot repay the loan.
Many high street banks, as well as online lenders, offer secured and unsecured business loans.
Mezzanine finance is a fairly complex form of business loan. It’s a type of loan that can be converted into equity if the borrower cannot repay the loan. Often, they are interest-only loans, but interest rates can be high.
Asset finance lets you use the assets of the new business as security for the loan. Assets can include stock, equipment and property. If you’re an existing business owner, you might be able to use assets of both your current and new business as security.
In many cases, the lender buys the assets from you and you then purchase them back through monthly repayments. If you can’t keep up with your monthly repayments, you risk losing these assets.
You might be able to use invoice finance to partially fund your business purchase. You borrow against the future income of the business, and rather than waiting until your invoices are paid, your lender advances you a large percentage of the invoice value upfront – typically up to 95%.
When the invoices are due, your lender collects the amount owed directly from the customer. The lender then deducts its fees and charges before paying you the remaining balance.
If you’re looking to buy a business premises, you’ll need a commercial mortgage. These work in a similar way to residential mortgages, as you’ll borrow a lump sum to be repaid in monthly instalments over a set term, with interest added. However, you’ll typically need a larger deposit of between 20% and 40% of the property’s value.
Exact eligibility criteria can vary depending on the lender and loan type. However, as a general rule, you’ll need a good credit history – although some loans, such as secured loans, might have more lenient eligibility criteria. If you don’t have much of a business credit history, lenders will likely look at your personal credit score.
Lenders will also want to check that the business you’re buying is viable and will need to assess the value of assets or property. This can take a few weeks. If you have an existing business, the lender will also want to know about its financial health.
When applying for a business loan, you’ll usually need to provide the following documents:
If you’re planning on using a loan to buy a business, it’s good practice to research the pros and cons.
The easiest way to compare business loans is by using an online price comparison tool. Make sure you look at factors such as the interest rate charged, the length of the loan, as well as any fees you’ll need to pay.
Keep in mind that a longer loan term can help bring down the cost of your monthly repayments, but also means you’ll pay more in interest overall, making it more expensive. Choosing a shorter loan term reduces the total amount payable, but it’s crucial to check your monthly repayments would be affordable.
Some of the alternative options to consider include:
There are many advantages to buying an existing business rather than setting up your own company from scratch. However, it’s important to carefully consider how you’ll fund the purchase of the business and weigh the different options available to you. Also, ensure you have a good understanding of the business’ financial situation so you know where improvements can be made and how the business can grow.
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