How You Buy A Business With No Savings And A Bad Credit Score

Buy Businesses Without Savings Or Bad Credit Score?

By Russell Bowyer

When I bought my million-dollar business, I didn’t have enough savings to buy it, but once I understood that I could use the business I wanted to buy “to fund its own acquisition“, the amount of savings I had didn’t actually matter.

You can buy a business with no savings and a bad credit score, if you fund the deposit using the cash in the business or by raising asset finance against its assets, and pay the balance of the purchase price from the business’s future cash flows.

Why this didn’t matter is because I had various funding options to buy a business using other people’s money instead.

These included using bank loans, asset finance on the business’s assets, using the business’s cash, and deferred consideration or seller financing.

Taking the first of those options, which is to use bank lending to buy a business, this will normally need to be structured as an asset purchase, as banks don’t normally lend to buy shares in businesses of this size.

Plus, there are a number of downsides to bank lending, to fund a business acquisition.

These include;

  • How long it takes to arrange the loan (so this method counts out a quick sale, if the seller is truly motivated to sell);
  • You need to have collateral for the loan to be secured (in the same way as a mortgage works on a property purchase), if you don’t have the collateral required, you can use a government backed loan guarantee scheme, which acts as collateral instead, and then on top of that;
  • You have to give a personal guarantee for the loan, which means if the business defaults on the loan, the bank will come after you personally to repay the loan.

Bank lending also normally assumes you have the deposit too, as banks like to see that you have skin in the game. The amount of deposit required could be your deal breaker, if you don’t have the savings for the amount required.

Also, by using a bank loan to buy a business, this will mean you pay the owner 100% of the proceeds at the point of sale, which is not ideal.

One other constraint on bank lending is how the bank will still only lend if the proposition stacks-up, even if you have the government backed scheme. In other words, the security in the form of a government guarantee is a secondary decision, where the first decision is whether they will lend in the first place.

Where this becomes a problem, is if the bank decides the business isn’t in a sector they lend to, or if the business doesn’t pass their checks, but also, if the business or you personally have a bad credit rating, the bank is unlikely to lend.

So, all in all, bank lending isn’t the best option to buy a business, but if you want to use this as an option, it does work.

The best way to fund the acquisition of a business, if you don’t have the savings to fund the required deposit, and/or if you have a bad credit rating, is to use the business to fund its own purchase in another way.

This is achieved by either using the business’s cash or by using asset financing against “the assets the business has” to fund the deposit, and then pay the balance of the agreed price, from the business’s future cash flows.

This is why I recommend you only buy a profitable business, so the business will have the profits and cash flow to pay for itself.

When I say to use the cash the business has, you need to be careful to agree with the seller to keep enough cash in the business for working capital, on the day of completion. Which is another negotiation in of itself.

The amount of cash the business has over and above its working capital, is what I call “excess cash”,‘ which is money that is surplus to the immediate day to day requirements or ups and downs of the bank balance of the business.

I would normally recommend a business has working capital cash that represents enough money to cover 3 months of overheads, on the assumption the business has no sales for those 3 months.

If the business doesn’t have enough cash, after setting aside working capital cash, to pay what the owner needs to complete the deal, you can use the other assets the business has as collateral to raise asset finance to pay all of, or the rest of the deposit.

Other assets would include equipment, vehicles, customer invoice financing or even the business premises.

The downside of asset finance, is it will inevitably slow the deal down, as lending always does.

So if you can agree to use the cash only for the initial deposit, even better. This is especially true if the owner needs the deal to be done very quickly.

You may ask, why would the owner agree to accepting what is essentially “their cash” in the business as payment of the deposit, which is a very good question?

But when you discover that in many tax jurisdictions, the U.K. and America included, paying the “excess cash” from from the business as part of the sales proceeds, instead of as a pre-sale dividend, will normally save the owner tax.

This therefore becomes a win-win for you and the owner, plus it’s quick to arrange too vs asset finance.

If you are trying to avoid any form of bank lending to buy a business, which is what I recommend, after agreeing what’s to to be paid as a deposit, and how this will be funded, I recommend you agree with the owner to pay the balance of the sale proceeds from the future cash flows of the business.

This is often referred to as seller financing or vendor financing.

The benefit to you of using the business for the deposit and by using the business to pay the balance from its cash flows, is that you don’t need to have significant savings to complete the deal.

But not only that, if your credit rating isn’t good, which would make bank lending difficult or impossible, if you use seller financing your credit rating is very unlikely to be an issue.

But also, in addition to you benefiting from this method of financing a business purchase, the seller benefits too, as they get to sell their business, which ordinarily may not sell, as there isn’t a queue of business buyers, and banks are not forthcoming to fund business acquisitions either.

This method of buying an existing business is even more of a benefit to the owner if they need the deal done quickly too, as there’s no lengthy form filling and bank scrutiny to go through.

To conclude, if you buy a business how I recommend, which is to fund the deposit from the business and the balance too, it doesn’t matter if you don’t have the savings to buy a business and if you have a bad credit rating.

Now all you need do, is to find yourself a business owner who is be prepared to sell their business.

If you have any questions on this topic about buying a business, or on any other aspect about the process involved in buying a business, please drop a comment below.

And always remember that no question is a stupid question, if you don’t know it, you don’t know it, and by having the answer to a question you have, might be all it takes to move to the very next step in your journey to buy a business.