How to finance a business purchase

If you're looking to buy a business, you will have to find a way to finance the deal. This article will cover the different finance options available when purchasing a business and which is best suited to your scenario.

March 2022.3min read time

Purchasing a business can be pretty nerve-wracking, especially when deciding how you would like to finance the acquisition and where you will access this credit.

If you're looking to buy a business, you will have to find a way to finance the deal. This article will cover the different finance options available when purchasing a business and which is best suited to your scenario.

This article will cover the following:

  • Secured Bank Loans

  • Unsecured Bank Loans

  • Asset Finance 

  • Commercial mortgages

  • Grants

Bank Loans

This is one of the most popular finance methods.

Bank Loans, in general, all operate on the simple basis:

You agree on a fixed amount with the lender and pay the amount back with interest in a specified period. However, banks do not provide the total amount; they only offer 50-70%. So the remainder has to be made up in cash by the buyer.

There are two types of bank loans:

  • Secured bank loans
  • Unsecure bank loans

Secure bank loan Pros and Cons

Unsecure Loan-Pros and Cons

Unsecure bank loan Pros and Cons

Secure Loan- Pros and Cons

What is the difference between secure and unsecured bank loans?

Secured bank loans require you to provide an asset that you allow the lender to take if you cannot repay the loan.

Unsecured bank loans do not require you to provide an asset as a security protocol in an unsecured loan.

Asset Finance

Asset finance involves obtaining expensive assets, such as freehold property, land, industrial equipment and vehicles.

Some of the standard asset finance solutions including hire purchase and lease arrangements.

Hire purchase allows you to spread the cost of buying your business's assets.

Lease arrangements allow you to lease out the equipment you use and need to replace frequently.

You can use asset refinance to purchase a new business if you have an existing business.

Asset refinance is when you allow finance companies to buy your assets from you, giving you a cash sum, which you can use to purchase a new business.

You can then repurchase these assets from the finance company by forming a new finance purchase agreement.

Commercial Mortgages

A commercial mortgage is used when you buy a leasehold or freehold business.

You can use a commercial mortgage to buy a business premise or a finance bundle to buy a pre-existing business.

You can usually obtain a mortgage close to 100% of the business's selling price, but the minimum mortgage you can request is somewhere in the £250,000 region.

The loan terms ultimately come down to the state of the business you want to purchase and whether it can produce a stable cash flow. The business rates will depend entirely on the risk of the company.

Businesses with solid cash flow are expected to pay the mortgage back within 5-10 years. The term is generally 1-3 years for new or unstable businesses.

Also, just like secure bank loans, commercial mortgages require additional financial security.

Grants

Grants are provided to you by different sources. They can be on a local, regional, national or European scale. 

Grants are valuable, as they are not usually required to be repaid. 

Most grants will only cover a maximum of 50% of the total purchase, which means you will still need other sources of credit.

Local and regional grants are quick and easy to apply for, and a decision is made within 4-6 weeks.

National and European grants have a lengthy application process, taking 2-12 months to receive.

If you are interested in applying for grants, we recommend dedicating time to research them. This is because grants are highly competitive, and they have very specific criteria and rules on how you can spend the money.

Preparing a cash deposit

If you want to improve your chances of securing a bank loan, you must pay 15-50% of the selling price.

The exact cash sum value depends on your circumstances and the business.

A cash deposit will show the lender your commitment to the opportunity, and they will have more confidence in the transaction.

Now you have a clearer idea of the financial methods available to you when looking to purchase a business. However, don't forget to take some extra time to get yourself familiar with the commitments these options take, as you will have to pick an option that best suits your situation.