Buying a business is never easy, so it’s crucial to get things right when seeking out the financial support you need. You can find out more about how to access the finance you need to purchase a business, as well as tips for maximising your loan size, with Savvy in our comprehensive guide.
How do I get a loan to finance an existing business purchase?
The process of taking out a loan to buy an existing business, rather than invest in your current one, is more complicated and has several further steps involved. For the most part, you can do so with a standard business loan, either with a secured loan or unsecured finance. You’ll likely be required to be asset-backed to qualify for the loan, such as by property or valuable business assets, but there won’t necessarily be a requirement for you to attach anything as security.
There’s a range of different loan products and lenders in the market vying for your business as a customer, so it’s important to be able to sort through the various market offers and home in on one which best suits your needs. You can do this yourself by comparing small business loans to purchase existing businesses with Savvy, as we’re partnered with reputable financiers across the country offering affordable, convenient and 100% online deals. Consider their borrowing ranges, interest rates, fees, available terms and more.
Alternatively, with so many moving parts in the process, many opt for the help of a business loan broker instead when seeking out finance to purchase an existing business. They’re experts in the field and can reliably do the hard work for you, whether that’s comparing loan offers or negotiating better rates and features on your behalf with their partnered lenders. They serve as an intermediary between you and your lender, ensuring all the documentation you submit meets your lender’s requirements.
In what ways will my lender assess my application?
There are multiple factors in your application which your lender will look at when determining your suitability to purchase, own and operate another business. These include:
Your business’ ability to support the loan
First and foremost, your lender will require the loan you take out to be an affordable one for your new business to support. As part of your application, you’ll likely need to supply a business plan which outlines your projected revenue over the next year or two. Accounting for expenses, you’ll need to show the repayments taken on with the loan are manageable and leave room for error should your revenues fail to meet their projections.
Experience and trading history
Your history operating business and trading will factor heavily into your lender’s considerations. Usually, you’ll need at least two to three years of successful trading with your current business or, if you don’t own a business, have extensive experience working in the same or similar industry of the business you’re hoping to buy. For example, you’re more likely to be approved to purchase a caravan park if you’ve worked as a business manager of another park for the last five years.
The value of your assets and liabilities
How much the assets you own are worth, both personal and business, and any outstanding debts you have on them will also impact your lender’s assessment of you and your business. This is especially pertinent when you’re looking at secured finance, but it can also factor into your lender’s thinking when looking at an unsecured deal. Having more assets under your name or that of your business will strengthen your overall borrowing profile.
Your personal and business credit scores
Finally, they’ll look at both your personal and business credit scores when considering your application. Both of these ratings paint a picture of your creditworthiness over a period of the past few years, demonstrating how you’ve gone about servicing debt and how reliable you’ve been with paying them on time and in full. A higher score will hold you in better stead when it comes to getting approved, especially in terms of lowering your interest rate.
Top tips for increasing your borrowing power
As mentioned above, a good credit score will not only help you access more favourable terms on your loan to buy an existing business but also increase the amount you’re eligible to borrow. As you’ll be seen as a more trustworthy and reliable borrower than another applicant with bad credit, lenders will be more willing to approve larger amounts (assuming you can manage their repayments).
While unsecured small business loans are capped at a maximum of $500,000, you can borrow a much greater sum by attaching an asset as collateral. There’s often no real upper limit to your borrowing, relying on the value of your chosen asset to back up the loan and your business’ ability to service it comfortably across its term.
You may find that you’re eligible to borrow more if you take slightly more time to repay your loan. While lenders often approach longer loan terms with trepidation, as they’re considered a greater risk, boasting a strong profile will help your chances of approval. The amount of cashflow you’re able to dedicate to your loan term each month may increase, so you might be able to pay it off earlier in that case.
While your lender won’t need an extensive layout of exactly how each cent of your loan is to be used, providing a detailed plan as to your projected turnover and explaining how you arrived at that figure will make your lender more confident. This will also help you figure out exactly what you need, to save you from overborrowing and increasing the overall debt your business takes on unnecessarily.