Buying a business is a significant investment that often requires in excess of a 6 figure sum – an amount that few individuals will have within their existing cash flow or bank account.
Utilising an external funding mechanism to raise the cash required to purchase a business allows you to move quickly on opportunities, but can be challenging to acquire and of course, any form of borrowing comes with an element of risk.
If you have identified a business for sale that meets all of your requirements but are being held back by funding – read our latest blog post to find out more about the benefits and drawbacks of traditional and alternative funding options.
Traditional Bank Loans
Traditional bank loans have long since been the most popular way of acquiring funding to purchase a business, offering competitive interest rates and predictable monthly repayments.
In the past, it was a much simpler process to acquire funding through traditional sources such as banks, with financial institutions also more likely to approve applications from entrepreneurs and SMEs.
However, the lending criteria imposed by banks is becoming more and more rigid, making it increasingly difficult for businesses or individuals to borrow money for the purpose of acquiring another company.
Benefits of Traditional Bank Loans
Loans from traditional financial institutions still offer several benefits including:
- Generally offer lower interest rates than alternative forms of finance
- Predictable monthly repayments enable better budgeting
- Paying your loan back on time helps build favour with the bank which may give you access to wider products and services
- As well as the loan, you may have all your other financials such as your business bank account with the same provider
- You may be able to negotiate repayment holidays as required once the loan has been approved
- Banks are fully regulated financial institutions, offering you the best protection
- You may receive help and advice from a professional at the branch
Drawbacks of Traditional Bank Loans
However, there are drawbacks of traditional bank loans, such as:
- Increasingly rigid lending criteria
- May require collateral such as an asset
- Banks usually take your credit rating into account
- Paperwork is complex and the application process is long
- Banks may demand business plans, financial statements, personal financial information, and other supporting documents
- If you want to repay the loan early, you may be charged
Alternative Financing Options
If you are not eligible for funding through traditional sources, there are several alternative finance options available.
Alternative financing gives you access to tailored funding without necessarily having an established business, high credit score or detailed business plan.
There is a large range of specialised lenders in the UK offering financing options including bridging loans, peer to peer lending, vendor finance, trade finance, term loans, cash flow loans, refinancing and more – all of which have their pros and cons.
However, alternative lenders are not always fully regulated or established, meaning that there is a higher level of risk associated with this kind of borrowing.
Benefits of Alternative Financing Options
Alternative financing options offer several benefits over traditional borrowing:
- Easy application process with less documentation required
- Approval times are significantly faster
- Range of tailored finance options to suit your needs
- Flexible repayment options (dependent on the type of funding acquired)
- A perfect credit score is not required to access funds
- An alternative option for those that were unsuccessful in acquiring funding from the banks
Drawbacks of Alternative Financing Options
However, like traditional bank loans, alternative financing options have their share of drawbacks:
- APR is usually higher than bank loans, meaning more money is paid out in interest and the overall cost of the loan is higher
- The sheer choice of lenders operating in this space can be overwhelming
- Alternative financing options are generally for short to medium term loans
- As there is less regulation, you are not as well protected against rogue traders
- May require collateral such as an asset – but not in all cases
So, What’s the Best Option for Me?
The best route to financing your business acquisition will be different for every individual dependant on their circumstances.
In most cases, an established business with a solid track record will get a better deal from the banks. Whereas an SME or individual entrepreneur is likely to have more success through an alternative lender.
When considering funding options, we highly recommend engaging a financial professional to ensure it is something that you can afford.
But before even this, you should ensure that the business opportunity you are pursuing is the right one for you and will provide long term success.
Will the business offer continued growth and profitability? Can you handle the management requirements? Is the business fairly valued? These are all important things to consider before buying a business.
Find Businesses for Sale with Bristol Business Brokers
If you are in the early stages of considering a new business acquisition and would like to find out more about suitable opportunities for you – we can help.
Our team of expert brokers can guide you through the process of buying a business and connect you with the right people such as accountants, lawyers, and finance brokers to ensure that your acquisition goes smoothly and the financial risk to yourself is reduced.
To have a conversation about buying a business, give one of our brokers a call today on 0117 379 0117 or fill out a contact form and we will get back to you.