Financing the Purchase of an Existing Business the Easy Way!

Updated on 6th November 2024

Purchasing an existing business can be an exciting yet daunting venture, particularly when it comes to securing the necessary financing.

Unlike starting a new business from scratch, buying a business offers the advantage of established operations, customer bases, and cash flow, but navigating the financial landscape can still be complex.

Fortunately, there are straightforward financing options that simplify the process, empowering aspiring entrepreneurs to turn their business dreams into reality.

How to Access Finance for a Business Purchase

Before you contact a lending provider, there are three main factors you need to consider:

The Amount You Need to Borrow

Conduct a realistic assessment of the capital you need to complete the purchase, and the funds you need to ensure a smooth transition after. If you don’t secure enough finance, you may struggle to maintain operations after you take over the business. You’ll need to obtain a second line of credit, and you’ll end up paying a higher interest rate. If you borrow too much, you can end up paying interest on finance that you don’t need.

If you want to know more about how to access working capital without a loan, read our article here.

Create a Detailed Business Plan (Even for an existing business)

While making a detailed business plan is widely recognised as necessary for a new business, it can be equally important even when buying an existing business.

You should be able to show a lender how the business will manage outgoings, and how the business will generate enough revenue to stay profitable. Do your research and be prepared to demonstrate your business finances, including detailed financial statements, to show lenders how you will repay the amount that you borrow.

Establish a Repayment Timeline

You should have a clear schedule for the amount of time you will need to pay off the finance or business loan. This will include the amount you will be able to afford to pay back each month, and whether that amount will be fixed or increased as the business increases in size and becomes more profitable.

How Lenders Assess Finance and Business Loans Applicants

When you apply for a finance and business loans to buy an existing business, lenders will consider four main factors:

Experience

A potential lender will look for evidence that you are capable of running a profitable business. If you have experience in business, you will be a more viable candidate for finance. The more experience you have in the specific industry, the more likely you will be able to access a line of credit. If you lack experience, lenders will see you as more of a risk, and you’ll usually have to pay a higher rate of interest if you are able to secure finance.

Business Plan

As mentioned above, a detailed business plan will help you secure the finance you need. It will illustrate to the lender what you are aiming to achieve with their business loan, how you will make a profit, and how you will afford to repay the money borrowed.

It should detail your estimated costs and profits, and how you plan to increase revenue and grow the business over time. Make sure that you are clear about your goals, and that the estimated profits and business performance are realistic.

Assets

The lender might want to see that you have assets to cover the cost of the finance if you can’t make repayments. They will look at your credit rating, current finances, and the financials and assets of the business you intend to purchase. Additionally, verifying any intellectual property rights is crucial, as these can complicate the sale and affect ownership transfers.

Asset Finance is a funding solution that enables you to use the assets of the existing business you want to purchase as collateral to secure finance. If the company has assets of significant value, we can help you to access the funding you need to buy the established business.

Industry

The lender will look at the industry of the business you want to purchase. An industry with lots of potential growth is more attractive than a sector that is shrinking or considered to be riskier. If the industry is considered too volatile, you may struggle to secure finance – even if the business is currently profitable.

How Much Finance Can Be Accessed to Buy an Established Business

The amount you are able to borrow depends on several factors. The lender will assess the business valuation, your business plan, projected earnings, and your credit history to determine the amount you can borrow.

Lenders want to see that you are able to repay the money borrowed. If you can demonstrate a history of paying back credit, lenders will allow you to borrow more than somebody with no credit history.

If the business you want to buy has healthy cash flow and lots of assets, it is seen as less risky for the lender, and you are more likely to be able to secure finance.

For more information on the types of business funding available and how to choose the best solution for your needs, check out our free Essential Guide to Business Funding.

Finance Options for Buying an Existing Business

It’s possible to secure financing from a partner or investor to buy an existing business, but you will need to surrender a percentage of your business and future profits.

A business broker can play a crucial role in the selling process by providing valuable insights into the business’s current market value and financing options. They advise potential buyers on the importance of getting an independent business valuation and facilitate negotiations, establishing credibility in the process.

The easiest way to get funding is to secure finance or a business loan from a bank or an alternative lender. Credit unions are also valuable financial institutions that provide competitive loan options for purchasing businesses.

Financing your established business purchase this way enables you to remain in full control of the business. You borrow money to purchase the company and repay the sum borrowed with interest over an agreed period. Equity finance is another method of raising capital by offering investors an ownership stake in the business.

Find out more about what you need to know about financing a business here.

Business Finance

If you are buying a business that owns significant assets, it’s possible to secure finance by borrowing against the value of those assets. Vendor finance is a purchasing option where the previous owner allows the buyer to pay part of the sale price upfront and the rest in installments over time.

Invoice Finance can be used to access the cash tied up in a debtors ledger and benefit small businesses in a number of ways. Asset Finance can be utilised to access up to 100% of the value of the business’s equipment and machinery assets. ScotPac can help you to leverage the assets of the business you want to purchase to secure a line of credit to fund your takeover.

Asset Finance providers don’t follow the strict lending criteria that traditional banks use. The increased flexibility means that finance can be secured much faster.

Secured Business Loans

Secured loans are one of the most common types of financing for buying a business. Loan providers will have lending criteria that you will need to meet to be able to borrow money for the business purchase.

To qualify for a secured loan, you’ll need to have some assets that can be used as collateral. The lending provider will also want to see your business plan, the financials of the business you wish to purchase, and a detailed assessment of the business’s industry, customers, and projected profits.

Unsecured Business Loans

Unsecured loans are usually easier to access than a secured business loan. This type of loan isn’t secured against the assets of the business and will usually require a personal guarantee from the loan applicant. This means less risk for you as the borrower, but more risk for the loan provider. You will usually have to pay a higher rate of interest than a secured loan.

For more information regarding business loan repayments, check out our guide here.

Peer-To-Peer Lenders

Peer-to-peer lending, also known as “crowd” or “social” lending, is facilitated through an intermediary platform that connects borrowers with lenders. Securing financing from a business partner to buy out a co-owner is another viable option.

The lenders can be venture capitalists or individuals looking to invest their money. The peer-to-peer platform connects lenders with suitable borrowers that are looking to secure finance. The total amount you borrow is made up of lots of smaller amounts from multiple lenders.

Peer-to-peer lending works similarly to a traditional business loan: You borrow a set amount of money and repay the loan in full plus interest over a set period.

Budget for Closing Costs

The price of the business isn’t the only cost involved in completing the purchase for a business owner. You’ll also need to cover closing costs, including escrow fees, taxes, legal fees, accountant fees, and other administrative costs.

All of these fees need to be taken into account. As a rough guide, you should budget up to 10% of the purchase price for closing costs.

Financing Business Operations

Once you have signed on the dotted line and purchased the business, you’ll need enough funds to ensure a smooth transition and keep the business fully operational. Leveraging the value of an established brand can significantly influence your business growth and goodwill. If you plan to upgrade or expand any parts of the company, you should consider adding those costs to the amount you wish to borrow.

Lack of access to funding is recognised as one of the most significant barriers to entrepreneurship and challenges facing start-ups and small businesses.

Access to funding is crucial for maintaining cash flow and fueling business growth. ScotPac offers a range of financing solutions to help you purchase a business and secure a cash flow injection to drive the business forward once you take over.

Contact ScotPac to Explore Finance to Fund Your Existing Business Acquisition

ScotPac is the largest non-banking lender across Australia and New Zealand. We’re not just a finance company: our team of specialist lenders have over 35 years of experience and currently support over 8,500 businesses.

So, whether you’re considering a secured or an unsecured business loan, want to know what sort of finance can help you buy an existing business, or just a business owner looking to improve cash flow, contact us today.