Things to Consider When Securing a Loan to Buy a Business in the UK

Becoming an entrepreneur doesn’t mean starting a business from scratch. One can simply choose to acquire an existing business. After all, buying an existing business has greater advantages over building one from the ground up. 

For starters, one doesn’t have to face the challenges of developing a brand and building a customer base. Besides this, it eliminates the hassles of hiring and training staff and establishing an operational infrastructure. 

However, unless you have personal funds to buy a business outright, you would still need to apply for a business loan in the UK. 

There are various factors that will determine your eligibility to acquire a business loan. In this blog, we will discuss these factors to help you choose the right business loan.   

Check Your Eligibility For Business Loan

When deciding whether to grant you a business loan or not, the lender would want to know about you and the business you’re interested in buying. Since you and your prospective business are separate entities with individual financial histories, it’s fair that lenders review you and the business separately.

Your credit score is the first thing the lender checks to assess your loan eligibility. Experian, TransUnion, and Equifax are the three credit rating agencies in the UK. A credit score of 881 to 960 is considered good for Experian. For TransUnion and Equifax, excellent credit score ranges from 628-710 and 811-1,000, respectively. 

For any lender, it’s essential that they know how well an applicant is at managing personal finances. They will analyze your financial statements and personal credit history to determine your creditworthiness. 

Would you be able to pay back the loan in time? Do you have a line of credit? How are you managing current debts? These are some things your lenders may want to know from you. 

Lenders will also want to know if you have any experience running a business in the same industry as your prospective business. It’s crucial that you demonstrate a sound understanding of the industry to be able to secure the loan. If you’re running a business or have owned one in the past, expect your lenders to ask for its financial statements and credit history.

Some lenders also expect a down payment of 10% or 30% of the purchase price. Lenders are more likely to offer loans to applicants willing to make a down payment. Thus, ensure you have sufficient funds to make a down payment.  

Prepare Essential Documents 

Besides the information mentioned above, your lenders would ask you to furnish a variety of documents and papers. If you’re sending out loan applications to multiple lenders, there are high chances you might miss out on a document or two. Thus, sort and store all the necessary papers and documents in a binder or folder. 

To assess your personal finances, lenders may ask you to produce these documents:

• Bank statement
• Income tax returns 
• Details of personal debt, if any

You should also keep the documents of the business you’re preparing to buy.

Here are some documents you should have handy for the lenders to review:

• Statement of profit and loss
• Balance sheet 
• Cash flow statement 
• Tax return for the past two years
• Bank statement of the business 

There are a few additional documents that the lenders would need from you. 

• Business plan: Whether you’re starting a business from scratch or acquiring an existing one, you would need a business plan to secure a loan. Ian Gray, Director, UKBusinessloan.com, with 30+ years of financial experience, suggests, “In your business plan, mention how you’re going to run the business. Your business plan should be comprehensive and detailed to help the lenders assess its profitability.”
• Letter of Intent: This non-binding document shows a person’s intent to buy a business. It outlines the proposed price and terms for the purchase.
• Cash flow projections: The cash flow forecast is the projection of sales and expenses you think the business will incur in the coming years.
• Professional business valuation: Just like home appraisals, business valuations determine the business’s worth.

Choose an Appropriate Business Loan Option

Online Business Term Loan

Online lenders are a preferred choice for small business term loans. Compared to traditional banks, online lenders have less stringent criteria and even give loans to people with low credit history. Besides this, online lenders approve and process funds within a day or two, making it an ideal choice for people looking for immediate cash. However, such business loans have higher interest rates. 

Traditional Banks

These loans are issued by credit unions and traditional banks. They offer favorable terms and have lower interest rates as compared to online creditors. However, you must be a qualified applicant to be eligible for the loan. Meaning you should have a positive credit score and no record of financial delinquency. 

Unsecured loans

An unsecured loan doesn’t require the borrower to put anything as collateral to acquire a loan. While one still has to pay back the amount with interest, they can schedule the payment as per their financial abilities. 

Commercial mortgages

A commercial mortgage is another option to secure a business loan of up to £25,000. One can use the loan amount to purchase equipment, develop a business, or refurbish the infrastructure.

Asset finance

You can apply for asset financing if your new business requires assets or equipment for operations. Moreover, if you own assets, you can even use them as collateral to secure a business loan.

For anyone, buying a business and growing it into a successful venture is a significant milestone. Even if you don’t have enough funds to acquire a business outright, you can apply for a business loan in the UK. 

However, it’s best to do your due diligence when going shopping for a loan. Always seek advice from financial experts to make an informed decision.