Can I get a business loan to buy a business?

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 the right option for you.

Jeff Salway Published on 21 July 2021.
Can I get a business loan to buy a business?

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.

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 in making decisions. However, it can still be a difficult process, especially if you’re relatively new to running a business.

» MORE: 5 reasons to consider getting a business loan.

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 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 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.

How to get a loan to buy a small business?

The above applies to buying a small business as well. But if it’s a small business because it’s still relatively new and doesn’t come with a 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 small business it may be especially 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 means that profit margins can be narrow and cash flow is often unpredictable.

Some specialist providers offer restaurant and cafe loans of up to £250,000, 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.

» COMPARE: Merchant cash advances

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.

» MORE: How to fund property purchase and development

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 (i.e. they’ll agree to disregard your credit history if you can present a strong business case).

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?

The best way to compare different lenders and loans is to search the market using comparison websites.

Most comparison websites offer business loan tables that tell you the amount each provider can lend, the terms available and the representative APR. The APR gives you an idea of how different providers compare, but the exact rate you’ll be offered will depend on things such as the length of your loan, how much you’re borrowing and your credit record.

» COMPARE: Business loans

Image source: Getty Images

About the author:

Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more

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