Becoming the owner of your own company does not necessarily require you to build a business from scratch.
As long as you are able to raise the necessary funds to purchase the business, you can acquire a company that already has a successful track record. In the first half of 2024, mergers and acquisitions involving UK companies increased by 66% to £68 billion, compared to H1’ 2023. If you don’t have the cash on hand, you’ll need to get some kind of business purchase loan. But just how do you get funding to buy a business―and where do you find one?
In this guide you'll learn what a business purchase loan is, qualification requirements, funding options available, and how to choose the right lender.
What is a business purchase loan?
A business purchase loan is a type of financing designed to help individuals or companies acquire an existing business. It provides the necessary capital to cover the purchase price.
These loans are often used to facilitate management buy-ins (MBIs) or management buyouts (MBOs), making it easier for business leaders to take ownership or transition leadership.
What is a Management Buyin?
A management buy-in (MBI) occurs when a manager or management team from outside the company purchases a controlling stake or acquires full ownership of a business and replaces its existing management team.
What is a Management Buyout?
Management Buy-out (MBO) is when someone from the existing management team of the business purchases the business from its current owner.
Finding the Right Lender for Your Business Purchase Loan
In order to acquire a business purchase loan, you will need to choose a lender to get it from. Finding the right lender is the most important step of a successful business acquisition. Different lenders specialise in different types of financing and have varying risk appetites. Researching and comparing lenders is crucial. Consider these factors:
- Lender specialisation: Some lenders focus on specific industries or types of businesses.
- Finance products offered: Ensure the lender offers the types of financing you need (e.g., secured loans, asset finance, invoice finance).
- Interest rates and fees: When purchasing a business compare interest rates, origination fees, and other costs associated.
- Loan terms: Review repayment terms, loan duration, ability to adjust your repayment schedule and assess prepayment penalties or incentives.
- Reputation and experience: Look for lenders with a solid track record and experience in business acquisition financing.
How to qualify for a business purchase loan?
Lenders don’t give out business loans to just anyone. Instead, they’ll expect you to meet some requirements. That way, lenders can make sure you’re creditworthy meaning you’re likely to actually pay the loan back.
Every lender is different and have their own credit appetite. However, here are some of the things lenders look for when reviewing applications for loans:
Credit history
For starters, lenders will want to look at your personal credit score and credit history. Different lenders will set different credit requirements.
Business history
Lenders will want to make sure you have what it takes to run a successful business. That means they’ll look at your business history.
For instance, lenders will want to know about how profitable your current business is. They could look into your business credit report to see if you’ve been a responsible borrower in the past. Lots of lenders will only lend to your business if you have been trading for at least one year.
Guarantees
Lenders typically require you to pledge something of value, such as equipment or inventory, as security for the loan. This acts as a guarantee that they can recover their money if you fail to repay. If you default, the asset may be seized. Some lenders may also require a personal guarantee, meaning you have to secure the loan with other assets, such as your savings, home or other valuable possessions.
Documentation
Make sure you are fully equipped with the following documentation before applying for a loan: Proof of ID, Bank Statements and Tax Returns, Valuation of the business you’re purchasing and Proof of Address.
Business plan
Though not always required, lenders are more likely to favour applicants who can share exactly how they're going to build their revenue by sharing their strategy and financial projection.
Funding Options Available for Business Purchases
Unsecured Business Loans
An unsecured loan is a loan that doesn’t require any type of collateral. Instead of relying on a borrower’s assets as security, lenders approve unsecured loans based on a borrower’s creditworthiness. Since the loan is unsecured, it will be more expensive, and the loan amount will be capped.
Asset Finance
Asset finance involves using the assets of a business as security for funding. This type of funding can be used as security in much the same way as a property would be when taking out a secured business loan. If you have your own business in the background, a lender could potentially use the assets of both your current and the new business as security.
Invoice Finance
Where there are significant takings each month on delayed payment terms, Invoice finance may be used to partially fund a business purchase. It works by allowing you to borrow against the future income of the business, with funds being released when the invoice is issued, rather than when it is paid.
Property Backed Loans
A property-backed loan lets you borrow money using the equity in your home or commercial property as collateral. The amount you can borrow depends on your property’s value. If you fail to repay the loan, your property could be used as security to cover the outstanding costs.
What business purchase loans do we offer at Time Finance?
At Time Finance, we help businesses secure the funding they need for acquisitions through our asset-based lending (ABL) solutions. We offer business purchase loans by combining various financing options into a single, tailored ABL package. This can include property-backed loans, invoice finance and asset finance. By combining these solutions, we can provide significantly more capital to support your business acquisition. To learn more about our Asset Based Lending solutions, get in touch with our team today.