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.

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