When it comes to funding the purchase of an existing business, it’s worth exploring all of the options as chances are, you’ll need a hefty amount of capital to complete the purchase.
Each finance option comes with pros and cons and it’s important that your chosen sources of finance suit both you as an entrepreneur and your needs as a business. In this blog, we discuss the various financing options available when buying a pre-established business.
Bank Loans, Overdrafts and Credit Cards
Banks can offer a range of financial support options to enable you to purchase a business. However, banks will only typically provide you with 50-60% of the finance you need and your eligibility will be subject to checks on your current financial and credit status. When approaching a bank for funding, they should also provide you with advice and guidance on what the best route for you may be.
The types of funding typically available through a bank range from a business loan over a fixed term, business overdrafts/credit cards, cashflow finance and borrowing against assets. Take the time to research options at several banks to see which offers the best rates, as there is likely to be a good amount of information available on each option.
Business Finance Specialists
A business financing specialist refers to a brokerage company that is very well versed in finance and accounting, with direct and vast experience working in business. Commonly, a business finance specialist will have access to a huge range of lenders and will act as a brand agnostic to ensure they can provide the finance option that is right for you.
If you’re considering this option, it’s worth noting that brokers differ in their approach, meaning some will charge you, the prospective owner of a business, commission, and some will charge the lender.
A good example of a company proficient in helping entrepreneurs and SMEs secure exactly the right finance for them is Teal (askteal.co.uk). Teal offer completely impartial advice and simplify the finance search for you by narrowing down only the best, most appropriate and most reliable finance options for your business. A commission fee will also only be payable if Teal is successful in sourcing your finance solution and this is conveniently added to the total amount repayable, and so nothing needs to be paid in the first instance. Better still, the commission payable is also capped at £2,000 – potentially saving you thousands if you’re looking to source significant finance.
Private / Angel Investment
Another way to acquire the funds to purchase a business is to offer a share of the company to a third party investor. If you choose to take this route, you may not be required to make repayments on the money that has been invested. Essentially, this is Dragon’s Den style investing, so this option may not be suitable if you’re not open to the idea of sharing ownership of your business, and you will need to establish whether the investor will be a silent or involved partner.
Personal Finance, Family and Friends
This option won’t be feasible for everyone, but for those who are lucky enough to have cash in the bank, a family member or friend willing to contribute, there are some advantages and disadvantages to consider. One advantage is the flexibility that will come from personally being or knowing the funder, such as no interest or lenient repayment schedules. A disadvantage is the strain it can put on your personal financial situation or, perhaps worse, on the relationship with your friend or family member as it is a very big commitment on both sides. Be sure to consider these points in depth before going ahead with using your personal savings or a loan from a family member or friend.
Rather than using solely personal or borrowed cash from someone you know, this finance method is often combined with another in order to limit borrowing from a single source. From this standpoint this type of finance could be worth considering alongside a business loan from the bank or Start-Up Loan from the Government.
Start Up Loans
Although buying an existing business is different to starting a new one, you may still be eligible for start-up funding to finance your new venture. To give some background on this option, the Start Up Loans Company was established by the government as part of a scheme to boost entrepreneurship that has so far supported over 50,000 businesses with £350 million worth of start-up loans.
This can be a great way to finance your business growth as the interest rate is relatively low, but more importantly, fixed, and the fund can be used to purchase existing businesses. The loans vary from £500 to £25,000 which gives a lot of flexibility for those looking to buy a business with the money, as you only have to borrow the amount you need. If you are buying a business with other partners or directors, you can apply for up to £25,000 each, with the amount lent to any one business being capped at £100,000. The flexibility covers time too, as recipients can pay back their loans over 1-5 years – again meaning you don’t need to borrow for longer than you have to.
Bear in mind that a start-up loan is only suitable for start-up businesses – those that are just starting or that are less than two years old. To succeed in obtaining the start-up loan you must source the financial accounts for the business in question and provide a copy with your application. If the business you wish to purchase has previously or is currently operating at a loss, you must detail a resolution to this in your application business plan.
Headquartered in Gateshead, but covering all of the UK, Transmit Start-Ups is a delivery partner for the loan scheme and, to date, has approved £25m in loans to over 2500 entrepreneurs.
The Enterprise Finance Guarantee (EFG) Scheme
This scheme is aimed at those who have been turned down for other forms of finance due to not meeting security, credit and proven track record criteria. In these circumstances, the EFG may be able to help you become accepted for financing options. To be eligible for the EFG you must operate in the UK and have a group turnover of no more than £41 million – the likelihood of exceeding this is of course very low when purchasing an existing small business, but you can learn more about the EFG on the Department for Business, Innovation and Skills website.
Overall, it’s important that you do extensive research on the type of funding options that are available to you when purchasing an existing business. There is no ‘one size fits all’ when it comes to financing buying a business, and so you need to take into consideration your personal needs along with what will work best for the business you wish to run. A great initial starting point is to get in contact with the providers from a range of options and have a conversation about your needs.
For more information on Start Up Loans, get in touch with Transmit Start-Ups, a national delivery partner of the government’s Start-Up Loan scheme, on 0191 490 9328 or email firstname.lastname@example.org To find out more about their services click here.