Recommendations on where/how to get a Business Loan (£15k-£25k)

edited 30 November -1 at 1:00AM in Loans
18 replies 2.5K views
gglazegglaze Forumite
265 Posts
edited 30 November -1 at 1:00AM in Loans
Hi guys, I've searched the forum and found a few people asking similar questions, but I guess every situation is a bit particular so I thought I would post a new thread..

I have the opportunity to get involved in a business with a couple of my long term friends/colleagues, and to buy shares in the business and become a partner. It is a business we are all very interested in and have been talking about doing for a long time, and just waiting for the right time/opportunity.

We have found an existing business that we can buy out and take over, and then redo using our own experience and expertise to turn it into a success (or try!). The owner is looking to sell his shares in the business, and we would pool our funds together to buy him out, and become shareholders.

The cost for my share would be in the range of £25k, for which I would become one of the partners, having a stake in the ownership of the business, and receiving salary and hopefully dividend income from the business in the future, assuming we are successful. I am not sitting here saying it is a sure thing - it is a venture with some risk, and because it is something we have a passion for, we are happy to put in our personal stake and take that risk - and we are confident we have a good chance of success because of our combined 17 years in the industry.

My partner has already put together a decent business plan, and I am planning to clean it up a bit with him and do some work on working out the financials and numbers. I expect we will have something reasonably professional and detailed to show as evidence that we have planned things out, and what we have to offer.

So, I am curious about the best ways to go about securing a loan for some of my investment, or if that is even a good idea. I have never really done anything like that before, so not sure how to go about it or where to look for the best terms, etc. I have quite a bit of credit card debt, a medium-level credit score, and I also have a mortgage on a flat, that is in good standing after about 5 years history - so nothing hugely negative other than some high revolving credit card balances. I also already have a Limited Company of which I am the director and shareholder (and sole employee), which is in good standing after about 7-8 years with profit every year.

I could perhaps come up with about £10k on my own, if that would help to secure another £15k for example on a loan. I'm not too sure if I would have anything to use as collateral to secure a loan, so I assume it would need to be unsecured. I wonder if it would be better/easier to get a loan to my Limited Co, and then let my Limited Co become the partner/shareholder, rather than me personally - if that even makes sense? I have no idea really.

I saw on another thread when someone asked a similar question, the response was around what would you be buying exactly for the amount of the loan here. So for £25k, let's assume I am buying, firstly, my share in the business and it's future dividends. Secondly, I presume (although I will need to get more detail) that the business we are taking over already comes with a number of assets, for example stock in inventory, also things like furniture, furnishings, etc. - although the property itself is rented by the business, not owned. So let's assume there is some asset value as well - and so perhaps of the £25k, some of it (maybe half) is directly to purchase assets of the existing business, and the rest (again maybe half) is to purchase the future dividends. Sorry I don't have the full detail on that yet - but of course I would have more detail before committing to anything.

Right now just trying to understand what my options for financing might be? Do I just go to a bank and ask for a loan? Should I go to HSBC (where I have my business banking already) and use my 7-8 years history with them to help? Are there other better ways to get a loan like this, rather than just walking into a bank and asking for it?

Thanks!
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Replies

  • poppasmurf_bewdleypoppasmurf_bewdley Forumite
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    More details needed.

    What business type is it? Are you working at the moment? Will you leave a current job for this one?

    No bank will lend to a Limited Company without security and/or a personal guarantee to cover the amount lent, as they would have no comeback if something went wrong.
    "There are not enough superlatives in the English language to describe a 'Princess Coronation' locomotive in full cry. We shall never see their like again". O S Nock
  • KingElvisKingElvis Forumite
    4.1K Posts
    Probably need a personal guarantee backed by property for the bank to go anywhere near this one.
    "We want the finest wines available to humanity, we want them here, and we want them now!"
  • edited 31 May 2012 at 11:58AM
    gglazegglaze Forumite
    265 Posts
    edited 31 May 2012 at 11:58AM
    I'm happy to take a personal loan if that is a better option. I was just thinking maybe it would be easier or somehow better through my LC.

    The business is a bar with small restaurant, in central London - so nothing completely out of the ordinary, but also not exactly a risk-free business as there is so much competition in the industry in London, and of course rents/costs are high, so you need a good profit to cover expenses. But we are confident we can do it successfully.

    Yes, I am full time employed by my own company as a consultant, and I work for investment banks during the day. I would not plan to leave my day job, so I would still have regular income from that, more than enough to support myself and my current obligations. However if the business is successful I may well try to scale down my day job to part time. I have already worked in this way for several years, being involved with management at bars in the evenings and still maintaining my day job - so it is not a huge stretch for me.

    Initially I would plan to continue to work full time at my day job, and then commit as much time as I can in the evenings to being involved and hands on with managing the new business. I would be responsible for some of the management (personnel and accounting/finances) and also for the kitchen, which is something I have a passion for and would want to have a lot of involvement in. My partner would focus on the "front of the house" management responsibility and general management, and I would focus on the "back" in the kitchen and bar, where my interests lie.
  • gglazegglaze Forumite
    265 Posts
    Also, just to mention - the other idea I'm considering is just liquidating £15k from my ISA account. I don't like the idea of making such a big cut in my retirement funds, but that's another option I could consider, if the loan route is looking impossible.
  • paddyrgpaddyrg Forumite
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    Only invest cash you can lose - it is a big punt. I would suggest either using the ISA cash, or securing a loan against it if you're worried about the tax-free status (but this will probably cost more)

    I would argue the price HARD - things like office furniture can be found cheap elsewhere, the lease may have extra costs, the stock clearly isn't the best-selling lines (or why sell the business?), etc.

    I don't know the business you're in, so have to speak in general terms, but remember it will take more of your time than you can imagine, and cost you more than you expect to keep the business alive over a year or more whilst you grow trade. Your £75k(?) would need to be enough to float a year, really, not just buy it out.

    Sounds like you might be taking over a restaurant/bar - if that's the case, is the existing one really worth £75k, could you pick up a cheap lease and start from scratch in a different closing down pub?

    And do be aware friendships are friendships, not business partners - it will strain your friendships when finances are involved, eg if person A thinks person B is not pulling their weight, or person C is ill so A and B carry the company whilst C recovers. Takes C a year to recover - then C wants to sell their third of the business A and B have built up...for a third of the current inflated value etc etc. Really can't recommend it.
  • if you are looking to buy a pub/bar/restaurant just a single word of advice
    DON`T
  • gglazegglaze Forumite
    265 Posts
    Thanks for all the advice guys, it is appreciated.

    I understand all of the concerns here, but let me just summarize and say I'm fine with all of that and have already considered all of that. I am very comfortable with my decision (even if it is taking a punt) - so at this point I'm just considering what are the best options for getting financing. I'm sure there are ways to get loans to start a small business etc - so trying to figure out the best ways, and if there is anything better out there than just going to a few banks and seeing what they will offer me?

    Regarding friends/business partners - yes I'm aware of the risk/strain that can place on a friendship. Luckily in this case, my business partner was exactly that, before we became good friends. So we are and have always been business partners first, and friends second, and our business relationship has already been established over several years of successfully (and profitably) working together.

    The main owner is not selling the business - he is actually looking for someone to come in and buy out the minority (silent) shareholders, and he would prefer it to be someone who would be actively involved and help to make some big changes to improve the (already profitable) business - and he is offering some of his equity in exchange for that (because we have special expertise to bring to the table). But he will still also be actively involved and maintain his majority share. So yes of course I am still doing my own investigations on the viability of the business, but these are good signs, and no it is not simply a case of an owner trying to dump a failed venture. The 75k is for a portion of the share we would take over, not for the entire business.

    Again I am aware there is a relatively large amount of risk in this venture - but it is something I am happy to take a punt on. So now just looking at options for organising my financing so that I can get a decent size share of the business.
  • CKhalvashiCKhalvashi Forumite
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    gglaze wrote: »
    Also, just to mention - the other idea I'm considering is just liquidating £15k from my ISA account. I don't like the idea of making such a big cut in my retirement funds, but that's another option I could consider, if the loan route is looking impossible.

    However, if you’re sure it’s going to work, you’ll make this money back time and time again.

    We own a bar in West London that does something ‘different’, and depending on how different you’re willing to get, could depend on how well you do.

    I was last in on Monday (waiting for OH to get home now, so we can play musical cars), and we were the busiest I’ve ever seen it (especially for a Monday night), however you need to get location, equipment and advertisement right before anyone should invest anything!

    CK
    "I kada sanjamo san, nek bude hiljadu raznih boja" (L. Stamenkovic)

    Please note: All posts on Coronavirus legislation refer to England unless specified otherwise.

    I can spell, my iPad can't.
  • paddyrgpaddyrg Forumite
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    Morning! Can I firstly say I am glad your position is a more tenable and solid than most people who come here wanting to own a pub, and it sounds like a better proposition all round, at least from your angle.

    Banks are cautious beasts at the moment, doubly so for small businesses. The only way they lend money is is you have collateral they can take - this would be your house, normally, or savings they can ring-fence and lock down. At the VERY LEAST they will insist on seeing your books, business plan, projected cashflow stuff, personal banking history, and offer to match fund. Basically 50% loan best case scenario.

    If this is a good opportunity, empty your ISA and it'll pay you back. The tax breaks at the mo - well on £15000 at 2% interest you are earning £300/yr, the tax you would be paying on that is the tax on that £300, which you would earn back in a heartbeat if the business is a real goer. What, maybe £75/yr? A loan of the same amount would cost you more than that.

    Can I just say, investing not in the business but effectively in yourselves, that's great - if you bring something new and valuable, wonderful.

    Just for what it is worth, really check how the vendor arrived at the valuation, it may be low, it may be high, who knows, but make sure there is a reason beyond "that's what the silent partners want" - eg get the multiples of profits etc, and how much the business is worth based on your shaeholding/price. Just bog-standard stuff.

    Also consider your get-out plan if it doesn't happen to work out - has the current vendor been looking for someone to buy out the minority shareholders for months/years, for instance?

    Really hope it works for you - raid the ISA, then ask your own bank for the extra if you really want to pay heavily for it. If you can raid the lot from savings, do so. If your own bank won't lend, not much point asking the others but instead look to make sure your business plan is rock-solid and see if they will talk round. Also consider a staged buyout, so £15k now with an extra £xk a month out of your share of the proceeds (as the business is already profitable and you will be making it even moreso).

    Head over to the small biz forum here, post your full position, there are a range of small business owners you can get ideas/thoughts from, generally quite supportive but realistic as nobody has any financial interest in you, so you get dispassionate opinions and ideas. They do generally want you to be happy and successful though, I have learnt a load from other peoples experience there.
  • EmmziEmmzi Forumite
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    your bank
    with
    - 3 years accountant verified accounts
    - a business plan
    - the co-owner
    - and at least 50% of the cash (the bank will NOT risk more than you are willing to put up yourself.)

    Also, do you need to buy out all the minority shareholders at once? Buy out one.. see how it goes.. if it makes money, in a year buy out another...
    Debt free 4th April 2007.
    New house. Bigger mortgage. MFWB after I have my buffer cash in place.
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