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Published 08 June 2023
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Loans to Buy a Business: Guide, Pros and Cons

Business loans aren’t just for building from the ground up. If you have experience operating a profitable business, securing a loan to buy a business might be an option for you.

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When we talk about starting out in business, we usually mean setting up a business from scratch.

But many entrepreneurs and business owners set out on this journey by acquiring an existing business to run and develop.

While there can be advantages to this approach, there are additional challenges too.

Perhaps the biggest is being able to secure the finance to buy a business, such as one that’s been put up for sale by owners that are retiring or exploring different options.

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Can I get a business loan to buy a business?

There are several finance options for anyone looking to buy an existing business. Perhaps the most obvious is a loan from a bank or building society.

One of the advantages of buying an existing business is that it should already have a financial history behind it that can help lenders make their decision. However, it can still be a difficult process, especially if you’re relatively new to running a business.

Advantages of using a loan to buy an existing business

Using a business loan to buy an existing business has several advantages, including: 

  • Faster growth: Buying an existing business with a loan may help entrepreneurs start or grow their business more quickly. 
  • Fewer risks: Purchasing a business with strong cash flow and an established customer base may reduce risks compared to starting from scratch. 
  • Simplicity: Existing businesses will have systems and infrastructure in place, so you can start operating the company more smoothly. 
  • Experienced employees: You may be able to keep on existing employees at the business who have the expertise to help the business become more successful. 
  • Future finance: It may be easier to borrow more money for the business in the future if it has a proven track record and strong profitability. 

Disadvantages of using a loan to buy an existing business

Some risks of using a business loan to buy an existing business include: 

  • Upfront costs: You may need to cover additional fees for professional services, such as solicitors, surveyors and accountants. 
  • More investment: A business may need additional investment on top of your loan if it was neglected or poorly managed to improve its chance of success. 
  • Outstanding contracts: You may need to fulfil or negotiate any existing contracts the previous owner has in place after the purchase.
  • Existing staff: You may need to resolve animosity among staff who have been kept on and are not happy with the change in ownership once you buy the business.

How do I get a loan to buy a business?

The principles behind getting a loan for a business are largely the same whether you’re building a business from the ground or buying an existing operation.

If you’re going through a bank or building society, the lender will look at factors, such as your personal credit record, a cashflow forecast, your budget plan, the amount you want to borrow, the loan duration, what you plan to use it for and the type of business.

You have a better chance of securing a loan if you already have a track record in business, especially if you have previous experience of growing a company.

Banks and building societies are more likely to offer you a loan if you’re buying a business that appears to be viable. They will want evidence of the profitability of the business, your plan for it, the outlook for the business and any trading and financial records available.

Can I get a loan to buy a start up?

The above applies to buying a start up as well. However, because it’s still relatively new and doesn’t come with a long track record or trading history, lenders may be more likely to ask for a personal guarantee.

This is a legal agreement that makes the company director(s) liable for repayments in the event of the business defaulting on the loan.

If it’s a secured loan, you will be asked to put up an asset (such as your own property) as security that the lender can sell if the loan isn’t repaid.

When buying a start up it may be worth exploring other sources of finance.

One option is crowdfunding, where online platforms are used to source finance from a large number of different individual lenders.

Another is to find an angel investor. These are usually wealthy individuals looking to help out small private enterprises in return for a stake that they can later sell for a profit.

Can I get a business loan to buy a restaurant?

The typically high costs of running a restaurant mean that profit margins can be narrow and cash flow is often unpredictable.

Some specialist providers offer restaurant and café loans with flexible repayment plans that reflect the ups and downs of restaurant profitability.

While they are usually unsecured, meaning you don’t need to provide collateral, the business owner(s) may be asked for a personal guarantee, which makes them personally liable for repaying the loan in the event of the restaurant being unable to.

It may also be possible to secure a merchant cash advance, where the loan is based on the money your restaurant is projected to make in future. The loans are often repaid through a percentage of customer card transactions, which means repayments can reflect the fluctuating cash flow that’s common in hospitality.

Can I get a business loan to buy property?

Commercial mortgages are used to fund the purchase of business premises. As with a residential mortgage, a commercial mortgage allows for the repayments to be spread out over a long period of time.

Can I get a loan to buy a business with bad credit?

Securing finance is usually much harder with a poor credit record, as it suggests to lenders that you may be at risk of being unable to repay your loan.

The main high street banks and building societies usually steer clear of lending to individuals or businesses with poor credit records, especially for significant investments such as a business purchase.

That’s not to say the door is closed entirely, however. A number of firms specialise in lending to applicants with bad credit records, while some specialist lenders and challenger banks may consider applications on a case-by-case basis.

Other possible alternatives include government grants, crowdfunding, asset financing and angel investors.

» MORE: Top small business grants in the UK

How can I compare business loans?

Shopping around could help you compare business loans and find the best deal. 

Price comparison websites are a great place to start and can help you compare lots of deals within minutes. You should pay attention to interest rates, loan terms, customer reviews and any minimum turnover requirements when comparing business loans.

» MORE: Try our business loan calculator

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