Getting a Loan to Buy a Business: Acquisition Finance

When you’re running a successful company, there will be opportunities along the way to add a new business to your portfolio. It might be that a close competitor is up for sale, or there’s an opportunity to diversify your offering by purchasing a business in an adjacent sector. 

But whatever the opportunity, you’ll need sufficient capital to complete the purchase – and that means getting your head around the ins and outs of acquisition financing. 

What’s acquisition finance?

Acquisition finance is a type of debt finance, designed to lend sufficient funds for a company to purchase another business. Acquisitions are usually funded by a term loan, often secured against the target company and frequently combining more than one type of finance.

Your route to this type of funding will differ depending on whether you’re buying through an existing incorporated company or as an individual entrepreneur.

Can you get a loan to buy a business?

Yes, loans are available to buy a business. Acquisition finance generally breaks down into a variety of different finance products, all packaged together to provide the necessary capital.

Startup lending can have a high bar to entry due to the higher risk of lending to a new, unproven enterprise. But when you’re running an established company, you already have the accounts, payment history and business credit score to prove you’re a robust, well-established business.  

The route to funding splits into two distinct routes:

1. Buying through a trading company: If you’re already a business owner, you can buy a new business through your incorporated company (typically, a limited company, public limited company or limited liability partnership). Because you (the owner) and your company are two separate legal entities, the loan application would be carried out through the business, with the lender assessing the lending risk of the company, not your own personal risk rating. 

2. Buying as a private individual: If you’re planning to buy a business as an individual, the loan process will differ. As you’re not incorporated, you’ll have no business credit score or company financial history to review. Instead, the lender will assess your loan application based on your own personal credit history and financial position. It’s likely you’ll be classed as a higher lending risk than an established company. 

Some lenders, including Funding Circle, do not offer acquisition loans to private individuals, due to their higher risk rating. If you’re a solo entrepreneur, you’ll need to approach specialist lenders that can factor your lack of company credit history into their review process. 

Types of finance used to buy a business

As an established incorporated company, you have many lending options to choose from. Acquisition finance is not a singular financial product – it’s usually a tailored package of finance, made up of a mix of different types of debt finance.

Let’s dive into a few of the more popular finance types:

• Term loans: These are variable-rate or fixed-rate loans that can provide the bulk of the required capital and are repaid over a set term with fixed installments. Term loans are commonly used to fund the primary purchase price of the business acquisition.

• Secured lending: This is a kind of debt finance that’s usually backed by specific corporate assets held in your business (assets like property, machinery or stock). These assets act as collateral, meaning that secure finance usually offers lower interest rates by lowering lender risk during an acquisition.

• Asset finance options: Asset finance is a specialist type of funding that unlocks cash tied up in balance sheet assets or future invoices to support the acquisition. If you have substantial assets in the business, you can secure lending against these items. 

• Seller financing: Also known as a vendor loan or deferred consideration, with seller financing, the seller agrees to receive a portion of the purchase price over time, after completion of the sale. This helps to spread the overall cost of the purchase. 

• Combining sources (tailored package): With a tailored package of acquisition finance you can access multiple funding methods – such as senior bank debt, seller finance, asset finance, and equity – to minimise your capital costs and fund the deal.

Think of acquisition finance as a broad marketplace, containing a mix of lenders and finance products. There’s no defined way to combine these different products. The idea is to search the marketplace to find the ideal package of lending – without taking on unnecessary debt or putting undue pressure on your company’s cash flow.

How much can you borrow to buy a business?

The amount of money you can borrow will be directly linked to the financial health of your business. Banks and lenders will calculate your profitability and debt to equity ratio to judge what an acceptable amount of lending will be for your business. Alongside other factors.

Your ability to borrow is assessed based on key profit, cash flow and debt/equity metrics:

• Profitability and cash flow: Lenders will want to see financial evidence of your forecasted profits and the expected cash flow levels in the business over future periods. This allows the lender to gauge whether your business has the ability to service the loan and meet the monthly repayments.

• Debt to equity: Banks and lenders will require your business to have a healthy debt/equity ratio. A business that’s already deep in debt won’t be in a position to take on additional liabilities. So it’s important to have a healthy ratio – a good debt ratio for a business is around 1 to 1.5, although ratios vary significantly across industries. 

• Debt service coverage ratio (DSCR): Lenders will generally require a minimum DSCR above 1.25x. This ensures your business has the free cash flow to cover annual interest and principal repayments by at least 25%–50% after accounting for tax, capital expenditure and working capital needs.

• Contributing your own cash/equity: It’s rare for UK lenders to provide 100% funding of an acquisition purchase price. As the buyer, you’ll typically be expected to contribute 20% to 30% of the transaction value through your own internal cash reserves, existing equity, asset finance or vendor/seller finance.

The amount you can borrow will vary from lender to lender, based on their own assessment of your profitability, cash position, debt/equity ratio, DSCR and the deposit you can raise through the company’s own cash reserves. 

If you can keep debt levels down, cash flow forecasts positive and demonstrate a consistently positive business credit score, your chances of a successful finance application will be higher. 

What financial data will lenders look at?

To gauge whether your company is in a healthy financial position – and is therefore a low-risk entity to lend to – banks, fintech providers and alternative lenders will want access to your numbers and financial data. 

Generally, lenders will want to see:

• Your company accounts and management information, to see if you’re profitable, in a solid cash flow position and whether there are any signs of adverse debt.

• Accounts and forecasts for the target company, to check that the business is a going concern that’s capable of generating revenue and cash flow. 

• The valuation of the business you intend to acquire, including the asking price, how that price was reached and what assets and IP will be included in the sale.

• Industry experience, and how well the business is performing against other close competitors in your industry, sector or niche. 

• Company trading history and credit score, including your payment history, debt red flags (county court judgments, etc.) and any evidence of previous insolvencies.

• Existing debt on the balance sheet, and historic data regarding repayments of this debt. They’ll also review the overall debt/equity ratios in the business.

• Post-completion plan, detailing how you’ll manage the new business, how capital will be used and your longer-term strategy for making the new business profitable. 

Note: this list is not exhaustive and specific criteria will vary from lender to lender. Business owners should research requirements before applying.

Will you need to give a personal guarantee?

Personal guarantees are common when applying for acquisition finance. By giving a personal guarantee against the finance, you take on liability for the debt if your company is unable to service the repayments, or becomes insolvent during the term of the loan. 

If you’re unsure about the risks associated with giving a personal guarantee, it’s advisable to speak to your legal representative before signing on the dotted line.

The difference between business and personal credit scores

As the owner or director of an incorporated company, you and your business are two separate legal entities. Because of this, it’s important to keep your company finances and your personal finances entirely separate. 

The same distinction applies to your credit rating – the company’s creditworthiness will be reviewed separately from your own individual creditworthiness.

However, if you’re giving a personal guarantee, the lender is likely to review your own personal credit rating to gauge if you’re a suitable guarantor. 

Most lenders will run a soft search at the quote stage. This will check your eligibility without leaving a visible footprint on your report. Once you accept a credit offer and formally submit the guarantee paperwork, the lender will usually perform a full hard credit check on you personally.

What to prepare before applying for finance

Having your company finances in good order makes it far easier to complete the loan application and provide the financial information the lender requests.

Before you begin the application process, make sure you have:

• Two to three years of target accounts for the company you’re aiming to buy

• Recent management accounts for the company 

• Valuation details, including the terms and conditions of the sale

• A business plan and strategy for running the new company

• Cash flow forecasts for the combined business 

• Your own company accounts and bank statements 

• Company registration documents and ID for your company directors.

The legal due diligence involved in an acquisition takes time. Because of this, acquisition finance can take longer to process than a standard business loan application.

The key steps in the acquisition process

To give you an overview of what’s required during an acquisition, let’s look at the key steps in the process. 

1. Establish Heads of Terms: Draft a Heads of Terms, letter of intent (LOI) to lock in the agreed valuation, deal structure and exclusivity period. This roadmap ensures both parties agree on the basics of the deal before incurring major advisory fees.

2. Calculate the total acquisition cost: Quantify the gross funding requirement, combining the agreed purchase price with stamp duty, legal and accounting fees. Also factor in the working capital needed to keep the target business trading.

3. Assess buyer capital contribution: Determine how much capital you can bring to the sale from your cash reserves. Lenders typically require buyers to fund a percentage of the total transaction costs directly to demonstrate their financial commitment.

4. Compare lenders on total cost: Evaluate the commercial debt options by comparing the true APR, arrangement fees, valuation costs and covenant flexibility. Don’t look solely at the headline interest rate. Look at the total cost you’ll incur with each lender. 

5. Carry out due diligence and underwriting: Conduct legal, financial and tax due diligence on the target company, while processing the formal loan application. Lender approval will remain contingent on satisfactory findings from the due diligence, credit checks and verified debt service coverage, etc.

6. Complete deal and start integration: Finalise the Share Purchase Agreement or Asset Purchase Agreement, transfer funds and complete any post-sale tasks. This can include filing Companies House notifications, updating bank mandates and executing the 100-day operational integration plan.

With any acquisition, there can be tax and legal consequences, depending on the deal structure and the way you’ve structured the funding. Be sure to take professional advice from both your accountant and your legal adviser before completing the deal. 

How to buy if you don’t have an existing business

The acquisition process we’ve outlined is designed for acquisitions made through an established incorporated company. But what options do you have if you’re a private individual with plans to buy an existing company?

Many lenders won’t lend directly to individuals, so you’ll need to look at alternative options. You may be able to access finance if you offer personal assets (such as property) as security on a secured loan. Seller financing is also an option if the seller is willing to spread payments for the acquisition over an agreed period. 

There are also government-backed routes to new business funding:

• The Start Up Loan scheme offers funding to start or grow your business.

• The Enterprise Investment Scheme and Seed Enterprise Investment Scheme offer income tax relief on the personal capital you’ve invested when buying shares in a target company, alongside capital gains tax deferrals.

How Funding Circle can help your acquisition

At Funding Circle, we offer multiple routes to finance for your business acquisition. 

To apply for funding, you’ll need to be an established, UK-based limited company and meet our turnover requirements. 

We offer:

• Small business loans of between £10,000 to £750,000, with terms from 6 months to 6 years (a personal guarantee will be required if your application is successful).

• Asset finance options via a lender panel. This is a sensible option if your deal includes buying major assets in the target business, such as high-value equipment or vehicles.

• FlexiPay, our flexible, on-demand line of credit that helps you manage the costs around the deal, rather than funding the actual purchase.

If you’re looking to kickstart your acquisition finance search, come and talk to the Funding Circle team. We’ll work with you to understand the deal and provide the most appropriate funding for your capital needs.

As with any significant investment, it’s advisable to seek professional advice from your accountant and legal adviser before taking on any debt.

Apply for acquisition finance with Funding Circle

FAQs

Can you get a business loan to buy a business?

Yes, acquisition finance is the usual route, combining a mix of loan and debt finance into a package that’s tailored to the needs of your deal.

How much deposit do you need to buy a business?

Generally speaking, you’ll need to put down 20%-30% of the purchase cost from your own cash reserves. So, if the purchase price of the business is £2 million, you’d need at least £400,000 in liquid cash to act as a deposit. 

Can you buy a business with no money down? 

Funding the acquisition of a business without the security, assets and crediit history of a limited company behind you is a challenge. However, if you have significant assets to act as collateral (such as property), secured finance may be an option. You could also ask if the current business owner is open to seller financing, where you pay off the acquisition in instalments over time. 

How long does it take to get finance to buy a business?

The acquisition finance process is more in depth and time-intensive than applying for a basic business loan. This is not a 24-hour process. Due diligence is needed on the sale, legal contracts are required and accessing multiple forms of finance takes time. 

Do you need to already own a business to get an acquisition loan?

Banks and lenders prefer to lend to existing incorporated businesses, rather than private individuals. An incorporated business has an existing trading history, payment history and business credit score – allowing the lender to fully understand the risk of lending to this company entity.

Disclaimer

09/09/26 – While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.