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. 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. 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.
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.
There are business loans to buy existing business operations and there are ways to leverage a business’ assets to pay for the purchase. 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.
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
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.
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.
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.
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!
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.