What is 'Acquisition Financing'

Acquisition financing is the capital that is obtained for the purpose of buying another business. Acquisition financing allows users to meet their current acquisition aspirations by providing immediate resources that can be applied toward the transaction.

BREAKING DOWN 'Acquisition Financing'

There are several different choices for a company that is looking for acquisition financing. A line of credit or a traditional loan are the most common choices. Favorable rates for acquisition financing can help smaller companies reach economies of scale and is generally viewed as an effective method for increasing the size of the company's operations.

Such loans are available through traditional banks as well as from lending services that specialize in serving this marketing. Private lenders may offer acquisition financing to those who do not meet the requirements of banks; however, they might also make the funding available under more expensive terms. For instance, a bank might be inclined to approve financing if the company to be acquired has a steady stream of revenue, substantial and sustained profits, as well as valuable assets.

By comparison, securing bank approval can be problematic when attempting to finance the acquisition of a company that largely has receivables rather than cash flow.

Multiple Forms of Acquisition Financing

Depending on the size of the businesses involved and the nature of the acquisition, there may be financing options through the Small Business Administration. The SBA 7(a) loan program, for example, may suit these needs for borrowers who qualify. The down payment may be as low as 10 percent for acquisitions when using this program. The borrower must, however, meet the SBA’s requirements on the size of the business, which includes limits on net worth, average net income, and overall loan size. There may also be extensive paperwork for the applicant that includes submitting details on accounts receivable, personal as well as business tax information, and personal and business financial statements. The applicant for SBA 7(a) financing for an acquisition may also need to supply their corporate charter.

Other means of financing an acquisition include debt that is paid back as shares and interest in the company making the acquisition. This may come into play if the buyer turns to close associates, such as friends and family, to provide financing to secure the acquisition. Sellers financing is another way to fund the deal. That usually entails the buyer making a down payment and the seller finances the rest of the transaction. The buyer will then may installment payments to the seller over an agreed upon period.

RELATED TERMS
  1. Acquisition

    An acquisition is a corporate action in which one company buys ...
  2. Acquisition Cost

    The acquisition cost is the cost that a company recognizes on ...
  3. Finance

    Finance is a term for matters regarding the management, creation, ...
  4. Owner Financing

    Owner financing is when a property seller finances the purchase ...
  5. Finance Charge

    A finance charge is a fee charged for the use of credit or the ...
  6. Asset Financing

    Asset financing uses a company’s balance sheet assets, including ...
Related Articles
  1. Investing

    The Ins And Outs of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  2. Investing

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
  3. Personal Finance

    The Best Way to Borrow

    There are many ways to secure funding. Find out the pros and cons of each way to borrow.
  4. Personal Finance

    Investment banking versus corporate finance

    Read an in-depth comparison of a career in investment banking and a career in corporate finance – and get advice about which one to choose.
  5. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  6. Small Business

    The Top Ways to Fund Your New Business

    Crowdfunding is no magic bullet for funding a business. However, P2P lending companies have made applying for a personal loan easier than it was 10 years ago.
  7. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  8. Small Business

    How Small Business Owners Can Create Cash Flow

    Without proper cash flow a business can fail.
RELATED FAQS
  1. What is finance?

    Finance is the study of how money is managed and the process of acquiring needed funds. Personal finance, corporate finance ... Read Answer >>
  2. Is debt a relatively cheaper form of finance than equity?

    When financing a company, the cost of obtaining capital comes through debt or equity. Find out which method generally provides ... Read Answer >>
  3. How do equity financing and debt financing affect a company's financials?

    Learn about the differences between equity financing and debt financing and how they impact financials. Read Answer >>
  4. What type of funding options are available to a private company?

    Understand how private companies can obtain financing for startup, growth or expansion projects, and learn how this differs ... Read Answer >>
  5. How does a company choose between debt and equity in its capital structure?

    Learn about the benefits and drawbacks of debt and equity financing. Find out how to compare capital structures using cost ... Read Answer >>
Trading Center