How to get a loan to buy a business in five easy steps

Running your own business doesn’t have to mean starting from zero. You can take on a business that already has a proven track record as long as you can raise the funds to buy it.

And the good news is that this can also make it easier to find a business loan. Here’s what you need to know. 

Key takeaways

• Work out how much you need to borrow before you apply - Add up the purchase price, legal fees and valuation costs, then compare this with your own working capital if applicable. Remember to work out if you might need any investment needed after the sale

• Lenders will want to see that you and the business is viable - Be ready to share your financial accounts, cash flow forecasts, business plan and details of your own experience alongside information about the business you want to buy

• Compare your finance options before committing - A business acquisition loan may suit some buyers, but alternatives such as seller financing or business investment could be a better option

How to secure a loan for your purchase

Getting a business loan to purchase an existing company is one way to work for yourself without facing all the challenges and risks associated with starting your own company. 

It can also be easier than finding funding for a startup because the company already has financial records that you can show banks and other loan providers to support your application.

When you apply for a business loan to buy a business, you may need to provide:

• Details of your personal credit history

• Proof of income

• Details of previous business ownership/experience

• A valuation of the business you want to buy

• The target business’s financial records and credit report

• A business plan, including financial projections covering up to five years

• Details of any assets you can offer as security

• Details of how much you want to borrow and how the money will be used

How hard is it to get a loan to buy a business?

Lenders can see the financial records of an existing business. As a result, it’s often easier to get a small business acquisition loan than it is to secure startup funding.

However, you and the business still need to meet certain business loan criteria to be eligible for a loan. 

Things lenders look for include:

• A good personal credit score - your score depends largely on your financial stability and ability to manage debt. So, the higher it is, the higher your chances of being offered a business or personal loan at a competitive rate

• Business experience – you’re more likely to make a success of a business if you have managed similar companies successfully in the past. This is particularly true if the credit reports of those businesses show good financial management

• The performance of the business you want to buy – lenders look at things such as the business’s customer base and its debt level to decide whether it’s a sensible investment. They also check the business valuation to ensure you’re paying a fair price

It can improve your chances of getting a business loan if you can put up business or personal assets – such as equipment, vehicles or your home – as collateral to secure the loan. However, it’s important to note you could lose these assets if you default on the loan.

Five steps to getting a small business acquisition loan

1. Check your eligibility

To get a loan to purchase an existing business, you generally need to be:

• At least 18 years old

• A UK resident looking to buy a UK-registered business

• Able to pass relevant credit checks

Most business loan providers also want to see a detailed business plan, and many impose further conditions, such as a minimum deposit – say, 10% of the loan amount.

So, it’s important to check the terms and conditions before applying to make sure you and the business meet the lender’s criteria.

It’s also sensible to check your credit report before applying for any loan, so you can rectify any errors.

2. Ensure you have the correct documents 

Documents you need to apply for a loan to buy a business include:

• Proof of ID

• Personal bank statements and tax returns

• Financial statements and tax returns for any businesses you already own

• A valuation and business plan for the business you want to buy

If you’re unsure, you can ask the lender for a full list of the documents it needs.

3. Choose a business loan

When choosing a business loan, you need to consider the different types of loans available. 

It’s important, for example, to understand how secured business loans work compared to unsecured business loans. 

A secured loan is backed by an asset, such as property or equipment, which the lender can claim if you fail to repay. An unsecured loan doesn't require a specific asset as security - but it may have higher interest rates or stricter eligibility criteria.

4. Choose where to get a business loan

You can get a business loan from various banks and specialist lenders. Our business loan comparison service is a good starting point when looking to see what’s available in terms of interest rates and terms.

5. Apply for a business loan

Once you’ve found a suitable loan, follow the lender’s application process to submit your request.

Can a personal loan be used to buy a business?

Yes, some personal loans can be used to fund the purchase of an existing business. However, you should check the lender’s terms first, as some banks and lenders allow borrowers to use their personal loans for commercial uses; others do not.

If you break the terms of your agreement, the lender could recall the loan – meaning you have to pay back the full amount immediately. 

Before using a personal loan for business purposes, you should also consider that it is you – rather than the business – who is liable for repaying the loan. And any missed payments will show up on your personal credit report.

For more on this subject, check out our guide to business loans vs personal loans.

Alternative ways to buy an existing business

A loan isn’t the only way to finance a business purchase. Here are four alternative ways to secure funding: 

Seller financing

It’s not generally possible to buy an existing business with no money. However, some business owners may agree to let you buy them out over time rather than with a one-off lump sum. This means you can use money that comes into the business to fund your purchase – and avoid borrowing altogether.

Investors/partners

If you’re struggling to raise the funds to buy a business, you can make up the shortfall by seeking investors or partners who can provide a cash injection in return for a share in the business and/or any profits.

Friends and family

If your loved ones are financially stable, they may be willing to fund your business ownership aspirations. Just remember defaulting on a loan from an individual close to you may cause problems in your personal life.

Savings

If you have savings, you can use this to fund all or part of a business acquisition. Just try to maintain a cash emergency fund where possible. 

In conclusion

Getting a loan to buy a business can help you forge a path a business owner, but it’s important to prepare properly before you apply.

Work out how much you need and check the business is financially viable - any lender will check this so it pays to do your research. The stronger your plan and the business' projections are, the better your chances of finding a loan that helps make the purchase.