How to secure funding to finance buying a business

You'll need your own money plus some of the bank's. How do you get it?

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However much you’d like to conjure a winning business out of the air, it’s important to realise that funding an enterprise requires a lot of effort. As a general rule, you need to put your own money on the line.

Your options are as follows: turn to friends and family, your own savings or to the bank.

If you don’t have sufficient funds personally, family and friends should be your first port of call. However, when you’re buying a business it is worth considering the bank. In good times it’s been known for banks to lend anything up to 70% of the total price. You will still have to provide the final 30%, or source outside investment.

The bank’s decision

If the bank decides to lend you the money could well be the green light to go ahead. Before you get to that stage though, there are certain things the bank will want to know. Julie Jones, Barclays’ principal business banker for the Tees and Wear region, explains what banks are looking for: “Generally we’re looking at the last three years’ business accounts, to see that it’s profitable. We’ll want to see that the trends are going in the right direction, that you’ve grown since year one. We’ll also look at your personal accounts over the last six months.”

As well as your business plan, the banks will want to see a cashflow forecast for your first year of trading. You also need to have prepared a budget plan, where you show that you’ve done your sums. While a 70:30 lending ratio is the norm, the banks may lend up to 80% for commercial mortgages. Repayment may not start for six months to give you time to settle into your business.

The final offer

If the bank has said yes, you can instruct your agent to put in an offer on the business that you want. But, as Kate Stamp, a solicitor and partner at Every Phillips Linford & Browns in Honiton, Devon explains, you might want to keep the champagne on ice for just a little bit longer.

“If the solicitor can be involved from an early stage, they can oversee the process and stop you getting into deep water. A solicitor needs to see the contract and will negotiate for you. “I need as much detail about what sort of business it is and see that all relevant areas are covered, say, if vehicles are included or stock,” Stamp says. The contract needs to be drafted to reflect everything that the buyer needs, tailored to your requirements. This can be difficult because buyers and sellers have different agendas. The buyer wants to have as much included as possible in the contract so that there is less to sort out. The seller will be trying to give the minimum.

When the amended contract has been returned, you will know whether any further alterations need to be made.

A search must be carried out with the local authority to see whether there are any planning or financial issues that affect the premises. A breakdown of fixtures and fittings in the building needs to be made too.

If there are any existing employees in the business that you don’t want to employ, seek advice on your liabilities regarding redundancy and unfair dismissal.

This all takes time, our experts tell us. “It takes a minimum of a couple of weeks on average,” reckons Stamp, “and that’s if everyone’s working for the same deadline. It can be between two and four weeks or it can be six.”

Once you’ve exchanged contracts, you need to apply for licenses and seek planning permission if it’s needed.

When all this is complete, the final documents will be drawn up, the final searches will take place, and you can finally hand over your cheque: you’ve got your business.

Then you’ll discover that getting funding’s really not the hardest part.

While a 70:30 lending ratio is the norm, the banks may lend up to 80% for commercial mortgages.

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