From a Financing Perspective, why is Buying an Existing Business Advantageous?
From a financing perspective, why is buying an existing business advantageous?
Maybe you’re in a position where you can choose to either expand your current business or acquire an existing business for strategic growth. Which choice will be easier to secure finance from a lender in a timely manner?
While financing can be secured for either option, there are certain advantages when it comes to applying for business loans if you are looking to purchase an existing well-run business with a proven track record.
Lenders want you to succeed in business. They assess loan applications against multiple criteria – but chief among them is whether the applicant or the business in question has a proven track record.
From a financing perspective, there are several advantages to buying an existing business. A few of them are:
1. Existing infrastructure
If part of your growth strategy is to purchase an existing business, you require an existing infrastructure. When it comes to assessing the financial risks of financing this purchase, a lender would be assured to see that the business already has a place of operations, technical staff, inventory and equipment, market share, and an existing customer base.
From a lender’s perspective, with an existing business, the market for the product or service has already been demonstrated over a period of time. An example of this might be a family-owned business where the principals are retiring after operating for decades, and the key technical staff will remain.
Meanwhile, choosing to expand your business means that you may be moving into a market where your business does not yet have brand recognition or an existing customer base. You may need to start from scratch in building contacts, a team, a business plan, purchasing equipment, etc. for a new market.
This would be considered a higher risk to a lender due to the delay in the set-up of your expansion.
2. Immediate cashflow
A new venture, or even expanding a current venture, can take longer to build up the projected revenue and become profitable. The risk of failure is relatively higher.
Comparatively, a business that already has solid sales and profits mitigates the risk to the lender as it supports the increased borrowing immediately. If the business you are looking to acquire is well-run and has a proven track record, then a lender would be well-assured by the existing cash flow of the company regarding financing this acquisition.
3. Financing Strategy
When your current company’s business operation is highly profitable, has a strong balance sheet, and proven management skillset, securing funding is not always dependent on the cash flow of the new business being purchased. Lenders can instead approve financing on the strength of your current business value.
Your growth strategy ultimately depends on your unique position.
If you are looking to purchase another business or expand your current operations, we recommend speaking with a trusted finance specialist to discuss your options for securing finance.
About the author
Director and Senior Partner Winquote
I built a seasoned Team based on an impeccable financial background that have the uncanny ability to provide modern SMEs with the solutions that fits ...