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Four ways to fund a business purchase

If you are looking to expand your company, one of the possible options is to acquire or merge with another business.

As you would expect, funding the cost of purchasing another business will now be your main challenge to support the long-term investment for your company and achieve your growth goals.

Generally, unless you already have the funds set aside, you will likely need external financial support to get you there. Fortunately, there are plenty of options available to help you raise the funding you need.

Below, we’ve listed our top four ways to fund a business purchase as part of your company growth strategy.

  1. A business loan
  2. Investment
  3. P2P lending or crowdfunding
  4. Cash flow solutions

A business loan

With a business loan, you can obtain a loan approaching 2 to 2.25 times the profit of the combined businesses in exchange for a regular repayment schedule. This level of funding might be sufficient to support the acquisition or you might need additional cashflow finance.

Ultimately, you will end up paying more back than you get, as result of added arrangement fees and interest payments. By researching the market thoroughly you can ensure that you end up with competitive terms. These repayments will be offset against the increased revenue you will be receiving.

Business loans are available from many sources, making them accessible for most businesses if you know where to look. Traditional lenders, such as banks, will likely be the most competitive in terms of rates, but you must be prepared with a business plan and projections for the combined business. If you are deemed ‘risky’, it might be worth looking into alternative lenders who may be more flexible.

Loans also tend to fall into one of two categories: secured or unsecured. With a secured option, the loan is secured against the business assets of the combined businesses. Depending on the transaction size, a personal guarantee may also be required. This collateral supports the loan, and gives the lender a way to recoup their money if you default on repayment. With lower levels of funding, it is possible that the loan could be unsecured, which still would require a personal guarantee.

Investment

While loans fall under debt finance, the alternative option is equity funding. This is where you pursue funding from an investor in exchange for shares in your company. This includes angel investment and private equity, each of which will pair your business with investors who want to support you.

In the case of angel investment, you could receive as much as £500,000 (which could be raised to £2 million through angel syndication). With private equity, higher levels of funding can be obtained, which should enable you to supplement any other funding that you have obtained.

The aim of any investor who expresses an interest in your business will be to get a return on investment on any money they invest in you. So, you must be able to convince them that your decision to purchase another venture will ultimately result in the growth of your business, alongside increased revenue and profit. This means having a strong business plan and supporting evidence to present to the investor.

The advantages of an equity investment are that you do not need to pay back your funders (though they will be entitled to a share of your profit). It can also be a great way to get hands-on advice, especially if your investor knows the industry. However, you may also need to be prepared to allow shareholders to influence your company decisions, depending on the level of their investment.

P2P lending or crowdfunding

An alternative solution to both business loans and investment is through peer-to-peer (P2P) lending or crowdfunding. Both work similarly, but P2P lending is debt and crowdfunding is equity.

With a P2P loan, many investors come together to lend small amounts of money via an investment platform, this money in turn is invested by the platform as a loan into a business. It works in exactly the same way as a business loan. In the case of crowdfunding, the funders will generally receive equity in your business which entitles them to a share of your profit.

Crowdfunding and P2P lending typically operate through dedicated online platforms, such as LendingWorks, Crowdcube and Seedr. To succeed, you need to present an effective pitch on behalf of your business that encourages people to support you. This means highlighting how the purchase will assist your business and allow you to generate increased revenue and profits.

By doing this, you stand a better chance of raising the monies to help fund the cost of your business acquisition.

Cash flow solutions

The solutions we have outlined here are generally ways to access more additional sums of money that add to the funds you have raised elsewhere to help with the business purchase. There are also short-term cash flow options that will enable you to raise smaller amounts of money. While these may not allow you to buy a whole business, they can contribute towards your fundraising or make cash flow less pressurised when merging with another company.

Cash flow solutions can include the following:

By finding an option that suits your requirements, you can ease any cash flow barriers that may appear during and after the purchase of another business.

Conclusion

If you have decided that the purchase of another business is the next step forward for your company, funding very quickly becomes your number one goal. However, identifying appropriate external support is the lifeline to raise the capital you need.

The methods described above are four of the most key ways to raise funding to facilitate the purchase of another business. By understanding the options available, you will determine the right choice for your company and access the finance you need.

If you are looking for finance to fund a business purchase, we can point you in the right direction. Get in touch today for access to our network of funders.

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