Buying a small business is often a choice between spending more now to spend less later and building everything up, which means spending more during the startup phase. If you’re planning to buy an existing firm, you’re getting an established brand, operation, and customer base.
That usually means taking on external financing if you can’t afford the costs out of your own pocket. And it’s also an extremely common route for small business owners. Recent stats say that the total value of bank loans to SMEs was £62.1 billion in 2024.
So, how do you finance buying a small business in the UK?
What are your options for financing a small business purchase?
You’re not locked into a single financing route for small business purchases. Options include personal finance, bank loans, peer-to-peer lending, government-backed finance schemes, and even angel investors.
In the middle of 2024, 43% of SMEs were already using external business finance, so it’s not an uncommon path to go down. Let’s go through the various options open to you.
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Personal funds
Self-funding, also known as bootstrapping, is using your own money to finance your business purchase. The money can come from savings, existing assets, or even income from an existing job or business venture.
Most SMEs use at least a portion of their own funds, even if it’s just to qualify for another type of loan. It’s estimated that 71% of SMEs use personal funds to run their businesses today.
Business term loans
Business term loans are just a fancy term for conventional bank loans. You take out a lump sum and repay it in regular instalments, plus interest. These loans can be used to buy another business or to cover various costs after you buy the business.
Depending on your credit score and the nature of the venture, these loans may or may not be secured against your existing assets. As always, it’s best to shop around to get the best rates.
Note that banks aren’t your only options for acquiring these loans. They can also be found through private investors. In some cases, you may also have to provide a personal guarantee.
Government-backed finance
The UK government offers several schemes that can help you get the financing you need to buy a small business. The main scheme available today is the Growth Guarantee Scheme (GGS), the spiritual successor to the Recovery Loan Scheme.
The GGS is run through various accredited private lenders. In exchange for providing financing, the government guarantees 70% of the lender’s loss exposure. However, you’re still liable for 100% of the debt.
In some cases, you might also be able to use government-backed personal loans for business purposes. Just be aware that these are usually designed to fund your own startup, rather than expensive business acquisitions.
Peer-to-peer lending
Can’t get approval for a conventional loan through a bank?
Peer-to-peer lending could be a possibility. Essentially, this is where you borrow via lending platforms, rather than directly from a bank. The basic principle is that they work the same way, but you’re taking financing from individuals or groups of individuals instead.
Angel investment
Angel investors could also play a role in enabling you to finance a small business acquisition. Unlike traditional loans, angels invest their own money in exchange for a portion of the equity.
Most angel investment deals involve lenders taking a minority stake in the business, so you’ll continue to retain control. If you’re comfortable giving up some of the ownership, this could be another alternative to banks. Plus, nothing is stopping you from buying the stake back later if the business is successful.
Can you use more than one type of finance to buy a small business?
Using multiple forms of finance to buy an existing firm is incredibly common in the UK. It’s known as hybrid financing or leveraged acquisitions and is simply the combination of multiple financing sources.
You might find that you’re naturally forced into this. For example, a condition of receiving a loan may require you to put up a portion of the money from your personal assets.
Applying for financing to buy a small business
Applying for financing begins by checking the lender’s requirements and seeing whether you meet them. There are platforms where you can enter your details and get an idea of what options might be open to you.
If you’re sure that you qualify, the process is relatively similar regardless of the lender. Here’s how it works:
- Prepare Documentation – After checking your eligibility, you’ll need to prepare a detailed business plan. This will include market research and realistic financial forecasts for the next few years. You’ll also need to confirm eligibility, such as proving that you’re a UK resident and you’ve got sufficient finances yourself.
- Wait for a Credit Check – Once you’ve sent off your application to the lender in question, they’ll read through your application and perform a credit check. Your credit score doesn’t just define your eligibility for a loan, but the rates a lender will offer.
- Inspect the Loan Terms – Assuming that your loan application has been approved, it’s down to you to read through the loan terms to see whether they’re acceptable to you. Look at the interest rates and calculate your expected monthly payments to see how they fit into your business plan.
- Accept Your Loan – If you’re happy with the lender’s terms, sign the final loan documents. You’ll usually receive your loan amount in a few business days, or even within a matter of hours with some private lenders.
How long does it take to apply for financing? This depends on the lender in question. There’s an increasing number of online lenders, separate from mainstream banks, that can give you a decision in a matter of hours.
However, the actual time it takes is much longer because it doesn’t account for the time it takes to build a business plan and compare lenders. Some entrepreneurs choose to speed up the process by turning to business financing brokers. Learn more about how long it takes to buy a small business.
Before you can apply for financing, though, you need to find a target business that matches up with your entrepreneurial goals.
If you’re ready to find businesses for sale in the UK, start browsing the Cogogo database for the latest listings in your area across a range of industries now. Or, get in touch with us for more information.
