Before you can buy a business, you will probably need to arrange finance.
It used to be the case that you could simply talk to your bank manager about a loan. However, since the recession that started in 2008, getting business finance has been a lot more challenging.
Many people fail to secure finance because they make some elementary mistakes when talking to lenders.
Here are some problems that arise and how to overcome or mitigate them.
1. Your credit history reveals problems
Lenders are only interested in lending if they think they will be paid back.
One of the main things they consider when they decide whether to lend is your credit history. Remember, they will get access to your financial history and consult credit reference agencies as part of the application process.
If you or any business you’ve previously ran has a record of defaulting on loans, they won’t take your application any further.
But things are bit more scientific that just checking whether you have a history of bankruptcy and CCJs. The lender will look at your personal and business credit score as a measure of your creditworthiness and that of your business.
Every individual and business has multiple credit scores, reported by various credit bureaus. Each credit bureau calculates credit scores slightly differently, based on a variety of factors, but basically, the lower the score, the less likely the lender is to lend.
A credit score can be low for several reasons, including bankruptcy; late or missed payments to lenders, credit card issuers and vendors; or even things like disputed payments. To raise your personal and business credit scores, you should make payments on time, spend well under your credit limit and keep credit accounts open.
A related problem is that some businesses are simply too new to have established any credit history at all. Successfully managing a business credit card for a period of time can establish a credit history and start building a higher credit score.
2. You don’t show that you have the right experience
If you have experience in running – or even better, owning – a business in the same sector as the one you want to buy, the lender can feel confident in your ability to make a success of your new enterprise. If you lack such experience, they may consider that you present too much of an unknown, and hence high, risk.
In some sectors, such as coffee shops, you may not need experience in exactly the same line of business. The skills you need may be transferrable from many other retail or catering backgrounds.
However, for more specialised sectors – such as hotels, where specific knowledge is required – experience in the field can be seen as essential.
If you do have the right experience, make sure you include it in your application.
3. You lack a clear business plan
To convince a lender that you know what you’re doing and have found a business worth investing in, you need to write a clear business plan.
You can use it to demonstrate your business skills. You don’t need a revolutionary business idea – lenders may be wary of anything too new and untested anyway.
You do need to show how you can make your business work. Include detailed figures as well as facts, with financial statements or projections, personal and business credit reports, tax returns and bank statements.
Show that you know about the market you’re entering and the product or service you plan to offer. Know who your competitors are: their turnover, profit, strengths and weaknesses – and why you can do things better.
4. You can’t prove that you can repay your loan
Your business plan should include details of projected cash flow and profit forecasts to demonstrate your capacity to repay the loan in addition to covering rent, payroll, inventory and other costs.
Things will look better still if you can show that your business is growing, but at the very least you need to show that your existing business is sufficient to afford repayments.
5. Company accounts are missing
You’ll need to furnish the accounts of the company you want to buy as part of your application.
Of course, it may be difficult to get detailed accounts in some circumstances, but this should sound warning bells for you as well as the lender. If you don’t have accounts, the lender can’t be sure that the business is worth what you want to pay – and neither can you.
6. You do provide accounts – but they show insufficient cash flow
Many small businesses struggle to keep enough cash in the bank, even if they’re trading profitably. This is often because they need to pay third-party suppliers immediately, but have to wait before they get paid for their product or service.
If this shows up in accounts, it suggests poor management or a business with problems, both of which will put lenders off.
If the business you want to buy has cashflow issues, you’ll need to show how you can fix them before you can make a convincing application.
7. Not offering security
If the lender sees you as any kind of a risk, they may require security or collateral. This is property that you agree the lender can take if you cannot make the repayment on a loan.
For business loans, security can include things like equipment and machinery, vehicles, stock and inventory. If you don’t have business equipment or property to offer as collateral, you may be able to offer personal assets such as your home.
You can only borrow an amount less than the value of the security you provide – so you can’t get a £200,000 loan with security worth £100,000, for instance. Loans are usually 50-70% of overall asset value.
Offering security can make it easier for lenders to agree a loan, and can mean better rates and terms, although it may not be essential to get the funding you need.
Loans don’t necessarily need security. Online lenders, for example, often don’t require collateral, but typically set higher interest rates than traditional banks.
8. You are not investing your own money
Any lender will want to know that you are serious about your business plans. The easiest way to show your commitment is to invest your own money.
If may seem a strange requirement – if you had enough cash yourself you wouldn’t approach a lender in the first place. But they will only consider investing in your business if you do so yourself.
You will need to put in at least 10%. The more of your own money you put in, the more the bank will like it.
Put together 30% or 40% of the price and a lender is much more likely to approve a loan covering the rest.
9. Your application does not look professional
Making a professional application will show you are serious about your business plans and have the skills you need to deliver them.
You might need a formal document for some lenders. It needs to be thorough and well presented at the very least.
A businesslike approach to figures suggests a better-run business, and that makes your business more attractive to the bank. Have a well thought out budget, supported by financial projections, with a profit and loss statement and cash flow statement. Your accountant should be able to help you present your figures.
Also get copies of relevant legal documents including articles of incorporation, contracts, leases, and any licenses and permits needed to operate.
One thing that is often forgotten, but can make a big impression on lenders: include details of your management team – if you have one – with details of their experience and skills.
Get some professional help
We have partnered with Rangewell, the UK’s leading access-to-business-finance provider, to make it easier to get the funding you need. Their experts can talk to
you about your funding needs, identify your strengths and challenges, and help you
find and approach the lender with the most competitive rates.
The Rangewell service is free, and there is no obligation – so whatever your business plans, why not try it out now?