Business Acquisition Loans: Funding a Company Purchase

A UK acquisition rarely completes on one source of debt. The usual layers, in order of who gets repaid first:

• Senior debt - a term loan, relationship-bank facility, or asset-based line secured against the company's cash flow and assets. The cheapest layer and normally arranged first.
• Asset-based lending (ABL) - receivables, stock, plant, and property borrowed against directly rather than enterprise value, useful where the target is asset-rich but EBITDA is thin.
• Vendor loan note - the seller defers part of the price, ranking behind senior debt. Often the cheapest way to bridge value and debt capacity, but senior lenders normally require it to be subordinated, unsecured, and payment-blocked during any covenant breach.
• Mezzanine debt - subordinated debt used to close a gap without diluting the buyer further, priced higher than senior debt and often blending cash interest with payment-in-kind. See our mezzanine finance guide for how this layer is structured.
• Buyer or sponsor equity - typically 25% to 40% of total uses for an ordinary owner-managed deal, though strong collateral or a deeply subordinated vendor note can bring that down.

Where the buyer is an incoming management team rather than an outside acquirer, the structure and equity mechanics differ enough to warrant separate treatment. See MBO finance for how management buyouts stack senior debt, vendor notes, and sweet equity.

Worked example

Target adjusted EBITDA is £500,000. Strip out recurring capex, cash tax, and normalised working-capital outflow of £150,000, leaving £350,000 of cash flow available for debt service. At a 1.35x DSCR, the maximum annual principal and interest the lender will accept is roughly £259,000. A five-year amortising loan at 8.5% supporting that annual debt service funds about £1.02 million. Separately, a 2.5x EBITDA leverage cap would support £1.25 million. The DSCR test binds here, not the multiple, so fundable senior debt is about £1.02 million before fees and minimum-cash requirements. This is the calculation that catches out buyers who size a deal off the EBITDA multiple alone. ESTIMATE, illustrative underwriting only.

Provider fit changes sharply with deal size and asset mix:

• OakNorth Bank offers bespoke acquisition finance for entrepreneurs, SMEs, and MBOs from £1 million to tens of millions, typically funding in weeks.
• Shawbrook runs corporate leverage facilities of £3 million to £25 million, generally 3 to 5 years, up to 3.5x EBITDA for most sectors, plus a dedicated £2 million-£20 million search-fund loan product.
• Virgin Money provides bilateral and club loans, super-senior facilities, and buy-and-build funding for owner-managed and PE-backed acquisitions, with no published minimum or pricing.
• Arbuthnot Commercial ABL writes £1 million-£35 million multi-asset ABL facilities for SME and lower mid-market acquisitions, completing 36 new facilities worth £118 million in 2025.
• Praetura Commercial Finance advances £350,000-£25 million using invoice discounting, stock, plant, property, and cash-flow loans, active in MBOs and MBIs.
• Beechbrook Capital lends £5 million-£25 million in senior and junior debt for sponsorless acquisitions and buy-and-build in the lower mid-market.
• High-street banks (Barclays, HSBC UK, Lloyds, NatWest, Santander UK) are usually lowest-priced but most conservative on leverage, buyer experience, and equity contribution, and commonly require personal guarantees from directors of limited companies.
• Funding Circle offers fast digital SME term debt of £10,000-£750,000 from 6.9% fixed, or £25,001-£250,000 from 13.4% fixed under its GGS product, but it is not a dedicated acquisition-underwriting product and an acquisition purpose needs confirming before relying on any offer.
• Growth Guarantee Scheme accredited lenders - the British Business Bank's directory listed 55 accredited lenders in July 2026. Acquisition is an eligible growth purpose where the individual lender accepts it, generally capped at £2 million per business group. By 31 March 2026 the scheme had enabled 21,194 facilities worth £3.64 billion in total, across all eligible purposes, not acquisition specifically. The government guarantees 70% of the lender's loss, not the borrower's repayment. The borrower remains 100% liable, and a lender can still decline the deal or require a personal guarantee.

Vendor finance sits alongside all of these. It fills the equity gap and keeps the seller aligned with the outcome, but senior lenders normally require the note to be contractually subordinated, payment-blocked, and limited on enforcement rights.

Whether the loan is a UK senior facility or a US SBA 7(a) loan, the lender's real question is the same: can the target's cash flow service this debt after the buyer takes over, not what does the buyer earn today. That means the credit decision rests on adjusted EBITDA, cash conversion, customer concentration, and continuity of management, not the buyer's payslip or personal balance sheet. A buyer with a strong personal income but no plan for who runs the business day-to-day, or a target where the outgoing owner personally holds every key customer relationship, is a harder credit than the headline numbers suggest.

The most common ways a business acquisition loan falls apart are mechanical, not strategic:

• Treating a headline SME rate as an acquisition offer. Many advertised products prohibit share purchases or lending into a new acquisition vehicle entirely.
• Overstating adjusted EBITDA. Adding back an owner's salary without budgeting a replacement, or including revenue synergies that are not yet contracted, overstates debt capacity that a lender will strip straight back out.
• Sizing from EBITDA and ignoring cash. Tax, capex, working capital, and existing debt can make a 3.0x leverage case fail a 1.35x DSCR test, as the worked example above shows.
• Assuming 100% debt finance. Goodwill-heavy acquisitions with no hard assets and a first-time buyer rarely obtain full purchase-price debt, and undated vendor deferral is not automatically treated as equity.
• Using GGS as if the government repays the loan. The borrower remains fully liable; the guarantee only protects the lender's own loss.
• Leaving the vendor note until documentation. Senior lenders control payment, interest, maturity, and enforcement terms on any subordinated seller paper, and a note agreed without a subordination concept can block credit approval outright.