If you are considering purchasing an existing business, you might be wondering how you can secure the necessary financing to do so.

Of course, buying an existing business offers numerous benefits that starting one from scratch does not. For instance, there are established operations, supply chains, customer bases and – hopefully – cash flow. Nevertheless, the challenge of navigating the financial landscape in order to acquire the business can still be difficult.

Fortunately, with the help of a lender like ScotPac, finding the right financial solution to help fund your business endeavour is simpler and easier than ever.

How to Access Finance for a Business Purchase

There are three main factors you need to consider before exploring which financial solution is right for your business purchase.

1. How much do you need to borrow?

Conduct a realistic assessment of the amount of capital you need to complete the purchase to streamline your search for the necessary funding. If you do not secure enough finance, it can be difficult not only to complete the sale but to ensure its success even if you do purchase the existing business.

Borrowing too much money can see you paying interest on finance you didn’t need. On the other hand, needing to obtain a second line of credit down the track, will also end up costing you more money than necessary.

2. Do you have a business plan?

Detailed business plans are invaluable, including for existing businesses. Why? They don’t just provide a roadmap to ensure the long-term success of your new venture: they can be used to indicate to a potential lender how you intend to manage outgoings and how you expect the cash flow coming into the business to generate sufficient profits. Read more about the ways to boost your business’s cash flow here.

When putting together your business plan, make sure you do your research thoroughly and demonstrate your financial strategy. This will give your lenders the confidence needed that you could repay any amount borrowed.

3. What is your repayment timeline?

Having a clear schedule for the amount of time you will need to pay off your financial loan is critical. This not only ensures that you have considered the size of the repayments, but it also allows you to tailor any particular solution to your overarching business growth strategies and profit modelling.

Understanding How Finance Applications Work

How do lenders assess finance and business loans applicants? In most cases, when you submit your application, lenders will consider four main factors:

1. Experience

A potential lender will look for proof that you are able to run a profitable business. The more experience you have, the more credibility you will have in demonstrating that your purchase of the existing business is a sound financial investment. If you lack experience running successful businesses, lenders will see you as more of a risk. You may still be eligible for funding, but it may come at a higher interest rate to offset the increased risk.

2. Business Plan

As outlined above, a detailed business plan is not just necessary for brand new businesses. A detailed and thought-out strategy can help secure the finance you need to purchase an existing business. A thorough plan will indicate to a lender what you are aiming to achieve, how you intend to generate a profit, and therefore how you will be able to repay the money borrowed.

Business plans should detail estimated costs and profits and outline plans for increasing revenue and growing the business over time. Clear goals, clear cash flow projections, and strong strategic plans are all integral parts of winning a lender’s confidence. Here you can read about how to create a cash flow forecast.

3. Assets

A potential lender might want to know whether or not you have assets to cover the cost of the finance if you can’t afford to make repayments. They may look at your existing credit rating, current finances or business, and the financials and assets of the existing business that you are looking to purchase. Assets can include intellectual property rights as well, as they can either complicate the sale, affect ownership transfers, or impact your lending eligibility.

4. Industry

What industry is the existing business operating in? Different industries come with different risks, potential and considerations. An industry with lots of potential growth is more attractive than a market that is shrinking or considered to be riskier due to external factors. If the industry of the existing business is considered too volatile, it can be harder to secure finance.

How Much Finance Can Be Borrowed to Buy an Established Business

The amount you are able to borrow depends on several factors. When the lender assesses the business valuation, your business plan, projected earnings, and your own credit history, they will use this information to determine the amount of money you can borrow.

Lenders want assurance that you will be able to repay the loan. If you have a strong history of meeting repayments, you will be able to borrow more money than someone with little or negative credit history.

The healthier the cash flow and the more assets that belong to the existing business, the less risky it is for the lender, and therefore the more likely you are to be able to secure finance.

That’s why developing strategies to improve cash flow is critical. If you need some guidance on overcoming cash flow challenges and improving your business’s financial health, make sure to view our guide here.

Explore Finance Solutions with Future Business Operations in Mind

It is important to note that even after acquiring the funding to complete the purchase of the existing business, you’ll need additional funds to ensure a smooth transition and keep the business fully operational.

Leveraging the value of the existing business’s established brand can significantly influence your ongoing growth and success. Not to mention that if you plan to upgrade or expand any parts of the company, you should consider adding those costs to the amount you wish to borrow.

Why is this important? Because the average small and medium business experiences negative cash flow for a third of the year and 17% incur negative cash flow for more than half of the calendar year! So, ensuring you have sufficient funding for ongoing business success is crucial, – not just the initial purchase.

Finance Options for Buying an Existing Business

Entrepreneurs in New Zealand have a unique challenge. There are simply fewer financial products and less diverse financial options for businesses to find the right funding solutions than in many other countries. The local lending market is also largely concentrated in mortgage lending and secured loans for small businesses thus limiting the perceived options for those entrepreneurs looking to purchase an existing business.

How to Secure Finance to Fund Your Purchase

The process of obtaining financing for SMEs can be challenging, particularly when seeking loans from traditional banks. Securing a bank loan often involves a lengthy and complex application and approval process, which can be discouraging or just difficult for many business owners. Additionally, banks typically have stringent eligibility criteria that may not be easily met by SMEs, making this route less accessible.

While equity financing is another option, it is not suitable for every business. This strategy involves selling a portion of the company’s ownership in exchange for capital, which can dilute control and profits for existing business owners. However, the advantage of equity finance is that it does not carry the obligation of repayment like debt financing does.

In contrast, non-bank lenders such as ScotPac, provide more efficient and more tailored solutions for businesses. These finance solutions often offer quicker access to funds and more flexibility in the assessment criteria, allowing them to accommodate the unique circumstances of various small and medium sized businesses.

So, what are your options?

Business Finance 

If you are buying a business that has significant assets, you may be able to borrow funding against the value of those assets.

Alternatively, vendor finance may be an option. In this arrangement the previous owner allows you, the buyer, to pay part of the sale price upfront and the rest in installments over time – via the financial solution with a lender.

Invoice Finance 

Invoice Finance can be used to unlock the value tied up in outstanding invoices owed to the existing business to fund its acquisition. The benefits of Invoice Finance are numerous: It allows you maintain complete control over how much money you borrow and when, it puts tomorrow’s payments into your pocket today, and it does not require any assets to act as security. ScotPac can help you leverage this otherwise inaccessible value to secure finance for your acquisition.

Secured Business Loans 

Secured business loan is one of the most common types of financing due to its relative simplicity when buying a business. Loan providers will have clear lending criteria that will determine your eligibility. However, because of that, secured business loans can take a longer time to achieve approval than some other financial options.

To qualify for a secured loan, you will need to have some assets that can be used as collateral, i.e., to act as security in case of a default on the loan. The lending provider will also likely want to see your business plan – including detailed assessment of the business’s industry, customers, and projected profits – and the financial statements of the existing business you are seeking to purchase.

Unsecured Business Loans 

Unsecured business loans are generally easier to access than secured business loans as they do not require assets as collateral. However, interest rates are generally higher and loan amounts are generally lower. This type of loan isn’t secured against any assets, so you will usually need to provide a personal guarantee to gain approval.

Let’s Explore the Right Finance Solution to Fund Your Existing Business Purchase

ScotPac is the largest non-banking lender across New Zealand and Australia. With over 35 years of experience and over 8,500 businesses currently being supported by our financial solutions, we are best positioned to understand your needs.

Our specialists can help you navigate the world of business acquisition. They can provide valuable insights into the current market value of the company you are considering buying as well as help you secure the right finance solution to fund the purchase of the business. So, if you consider purchasing an existing business and want to better understand the available financing options, make sure to contact ScotPac lending specialists today.