When you’re looking to build a successful business, there’s no rule saying you have to start it from scratch. In fact, buying an existing business can be a smart and efficient way to enter the market, thanks to an established customer base, existing cash flow and proven business model. But how do you fund a business purchase?

In the article, we discuss how to get a loan to buy a business, the types of loans to consider and how to qualify and apply for finance.

What are the main reasons for buying an existing business?

There are many reasons to buy an existing business offering various benefits and opportunities. Here are the most common reasons to buy a business rather than starting one from scratch:

• Immediate revenue through the door: You can start generating income from day one when buying a new business due to the existing customer base, which helps to maintain operations and provide cash for key purchases and liabilities.
• Proven success to build on: If buying a company with a proven business model and track record of success, you know things are working. This means less guesswork and unpredictability and a solid foundation.
• Existing relationships to leverage: Buying an existing business means there will be established supplier and customer relationships to take over, nurture and leverage for ongoing success and growth.
• Lower risks: Starting a new business from scratch comes with far more risks of failure and financial issues than taking over an existing one, where you can build on success, utilise key assets and bring fresh ideas to the table.
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Can I get a loan to buy a business?

The simple answer is yes. Most traditional banks and alternative funding providers, like iwoca, are open to providing a loan to buy a business, depending on your circumstances, business plans, creditworthiness, and any existing funding sources. 

Given that buying a business can be a large-scale purchase, lenders may be more stringent in their requirements, such as requiring assets to be used as collateral (for a secured business loan), requesting personal guarantees and evaluating personal credit history and previous experience running a business. 

Can I use a business loan to fund a management buyout?

Yes. As with buying a business you have no affiliation with, you can get a business loan to fund a management buyout. If a management team combines savings to buy out existing business owners, they may still need additional capital to reach the valuation and/or cover legal costs and post-acquisition working capital. You can apply for a business loan or a bridging loan to cover the gap in capital. 
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What are the types of loans to buy a business?

There are various types of loans you can use for buying an existing business, with their suitability depending on your specific situation, including secured or unsecured term loans, seller financing and asset finance. 

Below, we outline the most common loans for buying a business:

Secured or unsecured business loan 

Funding a business purchase with a secured loan or an unsecured loan is a popular choice for business owners looking to acquire a second company and needing to generate funds to finance the purchase.

Secured business loans require you to pledge assets as collateral, such as business equipment, vehicles or property, which can lower the interest rates and increase the loan amount available. 

Unsecured business loans, on the other hand, don’t require collateral, but often come with higher interest rates, due to the increased lender risk. However, you usually get greater flexibility with an unsecured loan and faster access to funds.

For example, with iwoca’s Flexi-Loans, you can apply in minutes, enjoy manageable repayment terms tailored to your needs and get an approval decision within 24 hours, with funds often available on the same day.

Seller financing 

Another option is seller financing. This is a type of loan agreement where the seller of the business agrees to the buyer deferring payments to allow the transaction to go through, without having all the upfront funds. Instead, a deposit can be made, with the rest of the purchase value repaid in instalments,

Sometimes in seller finance agreements, you can strike a deal with the seller for them to receive a portion of payments based on future performance, in an ‘earn-out’ structure. 

Seller financing is usually arranged by a finance broker or lending partner, who facilitates the deal and ensures the terms and conditions are sound.

Asset finance

When buying a business, you can either seek to purchase the company outright or acquire certain business assets. While you may seek a loan for this purpose, you could also explore using asset finance. 

Certain banks and lenders offer asset finance, and there are several types of agreements available. Like a business loan, the solutions help you spread the cost of the assets’ value, but you will often need to provide an initial deposit.

In asset financing, the assets being purchased are often the security against the borrowing, but you may also need to provide other existing assets as collateral.  
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How do I qualify for a loan to buy a business?

Each business loan provider will have its own eligibility criteria and approach for determining funding decisions. However, lenders will typically consider some of the following factors:

• Trading history – some providers will have a minimum trading length in their lending criteria.
• Business type/entity structure – how your business is structured and the industry it’s in can be either a lending consideration or even a blocker.
• Creditworthiness – providers will assess your personal and business credit score (if you own another business), with ratings helping lenders to determine how much to offer and how likely you are to repay the funds.
• Existing credit facilities – lenders may also look at what other loans and credit facilities you’re using.
• Collateral – if you’re applying for a secured business loan, the assets proposed as collateral will be assessed and valued.
• Business plan – some lenders may also ask you to share a business plan to help them understand your investment intent and its viability.
• Financial health and profitability – you’ll need to provide various financial statements, forecasting and revenue projections for validation and risk assessment.

How to apply for a loan to buy a business?

The application process for a loan to buy a business is similar to other types of loans. Consider the following steps to applying for a loan for a business purchase:

1. Determine your borrowing needs: How much money will you need, and what is your ideal repayment length?
2. Assemble your financial statements: Ensure that you have various financial statements and business details ready and available to provide to lenders.
3. Evaluate different lending options: Research different loan types and lenders to help determine the most suitable provider.
4. Start your loan application: Follow the required process for your chosen loan application, making sure to provide accurate information and adequate supporting documents.
5. Wait for a decision: Lenders will review and assess your application and conduct checks before making an approval decision – the timeframe can vary, depending on the lender (from a few hours to several days or weeks).
6. Sign the loan agreement: If you’re happy with the offer, then it’s time to accept and sign the agreement with the lender.
7. Receive the funds: Once you’ve signed the agreement, you’ll receive the funds and can start using them to support your business purchase.

Alternative ways to finance buying a business

If you don’t think you can achieve your funding needs by using a traditional loan to buy a business, you should consider alternative funding options. 

Alternative ways to finance a business purchase include the following:

• A flexible business loan from a digital lender: You can get fast access to finance and tailored repayment terms with digital lenders like iwoca, overcoming the stricter conditions and slower application process of many bank loan providers.
• Crowdfunding: This increasingly popular form of finance enables you to reach funding targets through a combination of smaller lenders, in exchange for various incentives, rewards and future earn-out commitments.
• Peer-to-peer (P2P) lending: Online P2P platforms connect buyers with investors/lenders willing to offer capital borrowing options to meet your funding needs.
• Angel investors: Friends, family members and people in your network may invest in your venture with equity finance that enables you to avoid taking on debt, but instead offer a stake in the business and a level of control.
• Venture capital (VC): VC firms have investors willing to offer capital in exchange for a percentage of future profits, ownership and voting rights.

Carefully consider what financing method makes most sense for your funding needs, financial situation, growth plans and risk appetite.

If you’d like to learn more about how iwoca can help support a business purchase,  explore our Flexi-Loan solution. You can borrow up to £1,000,000 for a few days, weeks or months (up to 60 months).  We provide affordable repayment terms aligned with your needs, with the option to repay the loan early without charge. 

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