Funding

The most common ways of financing a business acquisition is via one or more of the following:-

  • Personal finances – i.e. your own savings, personal loans, equity release/ remortgage.
  • Banks – via business acquisition loans.
  • Family – it is surprisingly common for money to be circulated within families and/or family assets to be put up as security against bank loans.

Other, possible, but far less common routes include:-

  • Private Investors.
  • Business Angels – whereby you sacrifice a portion of the equity of your business in return for capital investment from a 3rd party.
  • Grants.

Practical Approaches to Obtaining Bank Funding For Your Business Purchase

In practice, unless you are blessed with very deep pockets or a rich relative, it is very likely that you will require a level of funding from a bank to purchase a business. Do not be dismayed if you have already approached a high street bank and have come away disappointed by the level or terms offered or by the lack of clear guidance.

Banks are big, bureaucratic organisations frequently plagued by poor internal communication. From a personal banking perspective, you are probably all too familiar with the frustrations of dealing with call centres and being passed from department to department with no one actually able to deal with your issue or requirement.

Researching finance options for buying a business can sometimes feel rather ‘chicken and egg’ in terms of where to start. You try to contact the bank to explore how much they might be able to lend you, but are basically told that they can’t really give you guidance until you go away and come back with a business you wish to buy! Yet how do you know what type and size of business you can afford?!

The good news is that it does not have to be like this, the trick is knowing where to go and how to present your case for funding.

There are a number of specialist lenders who operate in various niches such as retail, healthcare, agriculture etc. Specialist departments or lenders who understand the nuances of their niche will generally lend significantly more than the average ‘high street’ bank’s business department and often on better terms. For those just beginning to think about looking for a business to buy, specialist departments will also often be able provide useful ‘ball park’ figures for you to work with in terms of how much you are likely to be able to borrow and therefore what type and scale of business you can afford to look for.

We can help you: If you would like to save significant time and hassle we will be pleased to put you in touch with a relevant lender or broker who will be able to quickly assess your requirements and give you a straight answer. Please click on the following link and complete and submit the 3 Minutes No Nonsense Funding Form.

Evaluating Offers of funding

Before signing on the dotted line for any loan or offer of funding, make sure you are clear on and are happy with the following key details:-

  • What is the proposed interest rate and is it fixed or variable?
  • Can the lender offer a ‘full service’ including an overdraft facility? For many business buyers an overdraft or alternatively a level of working capital can be an important, sometimes essential stop-gap for slow months.
  • Can the lender offer payment holidays in the early months or years – i.e. allowing you to pay just interest for a period of time to allow you to get up and running and reinvest profits back into the business.
  • Is the money being offered on a secured or unsecured basis and if it’s not already been discussed, ask what level of unsecured funding the bank will offer?

Secured funding

Secured funding operates on the basis that a bank will lend money against an asset owned by the borrower. Typically for a first time business buyer this will be there home and for an established business looking to grow via acquisition it is more likely to be a commercial property.

Banks are risk averse and secured funding minimizes their risk; if the borrower defaults on loan repayments the lenders are normally able to get their money back by forcibly selling whatever asset was put up as security. Due to its safe nature, secured funding is relatively easy to obtain from any number of lenders; the hard part is obtaining the security to put up against the loan!

Unsecured funding

Unsecured lending is money lent by a funder without requiring the borrower to put up an asset as security against the loan. For leasehold businesses, the loan will normally be ‘secured’ against the lease on the business premises.

Whilst the family home may not be specifically on the line if a borrower defaults on an unsecured loan, the individual or directors of the company borrowing the money are still likely to be personally liable [as banks normally ask company directors to sign a personal guarantee] to prevent them hiding behind most companies limited liability status.

Clearly there are pros and cons to secured and unsecured borrowing. Unsecured lending may cost you a little more in interest repayments, but it may help you and your family to sleep better at night, safe in the knowledge that if your business does not do as well as planned, the direct risk to your home is minimal.

Secured borrowing is likely to allow you to raise more finance, but it is also directly putting an asset of yours on the line, (normally your personal residential property) so the direct risk is higher.

In many instances, purchasers raise funding through two or more tranches of money, which may be made up of secured and unsecured funds.

Improving your chances of securing funding

When evaluating a request for a business acquisition loan (or indeed any other finance), underwriters primarily make their assessments on the basis of the ability and likelihood of the borrower to repay the loan.

This assessment is based on the current performance of the business you are seeking to acquire combined with your plans for investment and growth; it is also based on your perceived business acumen which will normally be qualified via:-

  • A business plan.
  • Cash flow projections [often included as part of a good business plan].
  • A face to face meeting [not quite an interview, but you are being assessed].

The success of your application for funding [particularly for larger amounts of unsecured funding] can therefore be considerably influenced by preparation, planning and presentation of your business plan, cash flow projections and yourself.

Finance brokers will often assist prospective borrowers in packaging applications for their clients as part of the process.

Template business plans and cash flow projections to get you started are available via our web shop located here. If you require assistance with funding please complete the online application form.