How do you expand your business or take out the competition? Buying an existing business is easier than you think.
Buying an existing business is a great way to start operating almost immediately. Many business owners choose to sell for various reasons, and interested buyers should begin by assessing the business’s industry, business performance, and market position. You can capitalise on the company’s existing market if you’re a competitor. Or you can expand your own business operations with a business that already has a market presence.
The great news is that anyone can buy a business. When considering your options, it’s important to determine whether the opportunity involves an established business with a good location, as these factors can significantly impact value and risk. How you plan on paying for that purchase, though, depends on different factors. Get familiar with your options and learn which ones are right for you.
Potential buyers should seek professional advice to help assess businesses and navigate the purchase process.
Due Diligence: What to Check Before You Buy
Before you commit to buying an existing business, conducting thorough due diligence is crucial to protect your investment and set yourself up for success. Start by carefully reviewing the business’s financial statements, including cash flow statements and balance sheets. These documents provide a clear picture of the business’s financial health, helping you identify any potential risks or red flags.
Take a close look at the business’s cash flow, revenue streams, and expenses to assess its financial performance and determine its true value. Don’t overlook the importance of evaluating all assets, such as physical assets like equipment, property, and inventory, as well as intangible assets like intellectual property and established brand value. Understanding the business’s overall financial position will help you make an informed decision.
It’s also essential to assess any outstanding debts, loans, or other financial obligations the business may have. This step will give you a realistic view of the business’s financial situation and help you avoid unexpected liabilities after the purchase.
Consulting with a business adviser or financial expert can be invaluable during the due diligence process. Their expertise can help you interpret financial information, assess the business’s assets, and ensure you’re making a sound investment. Taking the time to thoroughly assess the business’s financial position, assets, and outstanding debts will give you confidence as you move forward with your purchase.
Business Plan Development: Crafting a Winning Proposal for Lenders
A strong business plan is your ticket to securing a business loan and convincing lenders that you’re ready to take on an existing business. Your business plan should clearly outline your business goals, strategies, and how you plan to achieve success in your chosen market.
Start by developing a detailed financial plan, including a cash flow statement and financial projections. This demonstrates your ability to manage cash flow, cover start up costs, and make timely business loan repayments. Lenders want to see that you understand the financial needs of the business and have a realistic plan for repaying the loan.
Include a comprehensive marketing strategy and operational plan, highlighting your business’s unique value proposition, target market, and competitive advantages. Show how you plan to leverage the existing business’s strengths and address any challenges.
Break down your anticipated expenses, such as equipment finance, inventory, and other start up costs, to show you’ve thought through every aspect of the business’s financial requirements. The more detailed your business plan, the more confidence lenders will have in your ability to manage the business and repay the loan.
A well-crafted business plan not only helps you secure funding but also provides a solid foundation for your business’s future growth and success.
Finance Options
You have big dreams about buying a business. Before you can buy an existing business, however, you need to figure out where the money is coming from and what you need it for. Clearly defining your loan purposes and business purposes will help you choose the right finance option.
There are business loans to buy existing business operations and there are ways to leverage a business’ assets to pay for the purchase. It’s important to ensure you have enough money and access to funds to invest in the business and support ongoing business finance needs. Which one is right for you?
Option #1 – Secured Business Loans
Banks offer many products and services, but secured business loans may be the most recognisable. If you’re looking for the most economical financing solution, this one may be appealing.
Why?
If you apply for a secured business loan through a bank, you’ll find some of the best interest rates available. That can translate to tremendous cost savings over the life of the loan.
However, there are some downsides to using a secured business loan when you want to buy an existing business.
First and foremost, banks have notoriously strict lending criteria. The actual criteria vary from bank to bank but they will definitely look at your business plan and cash flows.
They’ll also want to know if the business has any current debts or loans, so don’t overlook due diligence and make sure to research the target company’s balance sheet beforehand.
Banks also want to know how much of a risk your loan poses to them. On top of your own collateral, they’ll also look at the existing business’ detailed information, such as:
- Profits and turnover
- Customer base
- Existing market
Banks may require you to provide security using an asset, such as residential property, or other assets like vehicles or inventory. The value and type of asset you provide can affect your borrowing capacity. The lender will set an approved limit, which determines your maximum access to funds under the secured loan.
Applying for a secured business loan is a lengthy process. If you need a financing option that’s faster, you may want to look into an unsecured business loan.
Option #2 – Unsecured Business Loans
If time is of the essence, you can try an unsecured business loan. This is also in a small business owner’s best choice because it doesn’t put their assets at risk.
A traditional secured business loan with a bank is a long and sometimes arduous undertaking. Applying for an unsecured business loan is almost the exact opposite.
Specialist finance lenders offer speed and flexibility in their loan process. Some lenders even offer processing within 24 hours. They don’t require long-term trading history or personal collateral to process a loan. Instead, these lenders look at a business’ current health and future earning potential. Some lenders may also consider applications from business owners with bad credit, though the terms and interest rates may differ.
Generally, you do have to pay higher interest rates for this option. This is because the lender assumes more risk with an unsecured loan than a secured loan.
Remember how secured loans require collateral? It’s all in the name “secured”. Well, an unsecured loan doesn’t require collateral. So, it’s in their best interest if you pay them back quickly.
Unsecured business loans can be used for a variety of purposes, including supporting working capital needs, covering operational expenses, or funding short-term projects. However, many lenders don’t have constraints on the money you can borrow based on your assets. They may have a range for the unsecured loans that they give out, but it isn’t necessarily based on the security you provide.
Shorter loan terms may be a blessing or a curse – it all depends on your financial situation. Repaying the loan in a short time is a great way to mitigate ongoing interest payments and give your credit rating a boost. But some borrowers may not be able to afford these larger repayments.
Also, keep in mind that you may have to pay more fees for an unsecured business loan in comparison to a secured one. They vary depending on the lender and individual circumstances.
Option #3 – Invoice Finance
If the business you want to buy uses invoices to charge customers, this option may help you raise capital. This type of financing allows you to sell any outstanding invoices to a third party, called a factor. The factor is responsible for collecting on the full invoice amount.
The good thing is that you may receive between 70% and 90% of the invoice amount upfront. This means you get a lump sum payment based on your outstanding invoices, rather than waiting for customers to pay over time.
You can then use the capital to finance any remaining amount of buying the business. Or, you can use it to help cover cash flow when continuing the business under new ownership.
Option #4 – Equipment Finance
Normally, equipment financing refers to a loan type used to buy specialised equipment and vehicles for the business. But if the existing business you want to buy already owns significant valuable assets, you can borrow against the assets to get financing.
Lenders have different terms and conditions for these types of loans, though. For example, you probably won’t be able to sell or upgrade the equipment you borrow against throughout the loan term.
Option #5 – Peer-to-Peer Lending
Marketplace lending is sometimes called P2P lending. It connects borrowers with investors or lenders using an intermediary platform. You can find individuals as well as companies that are willing to lend you the money you need to buy an existing business using a P2P platform.
If you’re looking for business loans to buy existing business, P2P lending works like a traditional loan. Simply put, you borrow money and repay it over a set term – plus interest, of course!
Interest Rate Considerations: Understanding the True Cost of Your Loan
When applying for a business loan to buy an existing business, it’s essential to look beyond the headline interest rate and understand the full cost of borrowing. Start by comparing interest rates and loan terms from different lenders to find the best fit for your business’s needs and financial situation.
Pay close attention to the loan term, any associated fees, and the repayment schedule. These factors can significantly impact your cash flow and your ability to manage business loan repayments over time. Understanding whether your loan has a fixed or variable interest rate type is also important, as this affects your exposure to potential changes in interest rates.
Higher interest rates can increase your repayment amounts and put pressure on your business’s cash flow, so it’s important to assess how different loan options will affect your financial position. Take the time to calculate the total cost of the loan, including all fees and charges, to avoid any surprises down the line.
If you’re unsure about the best loan option for your business, consider consulting with a business adviser or financial expert. They can help you navigate the application process, assess your financial situation, and choose a loan that supports your business goals without putting undue strain on your finances.
Picking the Right Loan to Buy an Existing Business
If you want to grow your own business, there are many types of business loans to buy existing business(es). The right one depends on your own circumstances.
If you have significant assets or a big company that can afford the risk, a secured business loan may be the best option for you. They offer significant savings if you can pass the big banks’ strict screening.
Small business owners who simply want to expand, may find that an unsecured business loan is the better option. They offer quick processing with flexible borrowing amounts and no collateral needed. Borrow as little or as much as you need to move your business plans forward.
If you’re ready to hear more about how an unsecured business loan can help you, find out more about our unsecured business loan benefits by clicking here.
