How to buy a business with no money down (UK): seller, asset and invoice finance

Buying a business with no money down is challenging, but it is not impossible. The tension is obvious: typically the seller wants 100% of the purchase price on completion, the day you buy the business, while you as the buyer want to delay payment as much as possible. There are three ways to bridge that gap in the UK in a way that can keep both sides happy: seller financing, asset financing and invoice financing. Here is how each works and where the risk sits.

Seller financing explained

I put seller financing as option number one because, in my opinion, it is the best option for the buyer. It is also, at the same time, the worst option for the seller.

Seller financing is when the seller in effect gives a loan to the buyer to buy the seller's own business. It can be recognised as a loan because the buyer takes over the business, possibly with no money down at all, and then owes money to the seller which is paid after the business has changed hands. The seller is paid out of the business they used to own, which is exactly why they will want some comfort that those payments will arrive.

Two practical points follow from that:

• Expect to be asked for a personal guarantee. In this scenario it is not uncommon for the seller to ask the buyer for a personal guarantee, especially if the buyer is buying through a limited company. Many buyers set up a special purpose vehicle, or SPV, to buy the shares in the target company. From the seller's point of view, an SPV with no assets is not much comfort if the deferred payments stop, so they will want you personally on the hook.
• No bank, and usually no interest. The advantage for the buyer is that you do not need to approach any banks, and you do not usually pay interest on the deferred purchase price. That makes it cheaper and simpler than borrowing from a third party.

I have covered how seller financing is negotiated and documented in more detail in Seller financing: how to buy a business with no money down.

Asset financing to buy a business

The second option available to a buyer is asset-leveraged financing, also known simply as asset financing. This is when the buyer takes a loan from a third party, for example a bank, and that loan is secured against an asset of the target business.

The most straightforward example is a mortgage secured against the premises, the real estate, of the target business. The lender advances money against the value of the property, and that money goes towards the purchase price. Other business assets can serve the same purpose, but property is the example most lenders and buyers are comfortable with.

The advantage of this kind of financing is that the assets you are putting up as security do not need to be owned by you at the time you apply for the loan. You do not have to put up your own house or your car as collateral. Instead, you use the assets of the business you are buying. That is what makes asset financing a genuine route to buying with little or none of your own money: the target funds its own acquisition.

The obvious limitation is that it only works if the target actually has assets a lender will take security over. A service business with no premises and no significant equipment gives you nothing to borrow against.

Invoice financing to buy a business

The third option is invoice financing. Again, the buyer takes a loan from a third party such as a bank, but this time the loan is secured against the outstanding invoices of the target business.

Suppose the target business has sent out invoices totalling £100,000 to its customers and those invoices have not yet been paid. You as the buyer can use those outstanding, unpaid invoices as security for a loan that is then used to buy the business. The lender is effectively advancing money against cash that is already owed to the business and is expected to arrive. For a business with a healthy order book but few physical assets, this can be the only third-party funding on offer.

Invoice finance risk: why not rely on it

Here is the tip I would give every potential buyer: do not rely solely on invoice financing for the entire purchase price. The reason is that invoice financing fluctuates.

The amount a lender will advance depends on the invoices that are outstanding at the moment the money is released. Between agreeing the deal and completing it, some of those invoices may be paid by the customers to the target business. That reduces the pool of unpaid invoices, which reduces the amount the bank will lend. The money is typically released at the last minute, on completion, so you may find that the lender gives you less than you need on the very day you are supposed to be buying the business.

If invoice finance is the only source of funds, that shortfall can jeopardise the whole deal. Use it as one component of the funding, alongside seller financing or asset financing, with enough headroom that a drop in the available invoices does not leave you unable to complete.

Combining the three

In practice, a no-money-down acquisition is rarely funded by one method alone. A buyer might negotiate a large deferred element with the seller, raise a loan against the target's premises for the balance due on completion, and keep an invoice finance facility in reserve for working capital or a top-up. The right mix depends on what the target owns, how much the seller is willing to defer, and how much risk you are prepared to take on personally through guarantees.

Whatever combination you use, the funding structure needs to be reflected properly in the deal documents, particularly the share purchase agreement, so that the seller's deferred payments, any security granted to lenders and your own obligations are all consistent with each other.

Next steps

Before you make an offer, work out which of the three methods the target business can actually support: does it have assets to borrow against, does it have a healthy book of unpaid invoices, and is the seller open to deferring part of the price? Then speak to a corporate solicitor with acquisition experience, so the financing is structured and documented in a way that protects you, including how the buying entity is set up and what personal exposure you are taking on.