What is an Acquisition Loan
An acquisition loan is a loan given to a company to purchase a specific asset or to be used for purposes that are laid out before the loan is granted. The acquisition loan is typically only able to be used for a short window of time, and only for specific purposes.
Once repaid, funds available through an acquisition loan cannot be reborrowed as with a revolving line of credit at a bank. The loan is applied for, approved, and must be used within the allotted time period for the purpose specified at the time of application. If it is not, the loan is no longer available. Once the loan is paid back per the payment schedule, no more funds are available.
BREAKING DOWN Acquisition Loan
An acquisition loan can be used by a company to purchase an asset or for another specific purpose. Acquisition loans are sought when a company wants to complete the acquisition of an asset but doesn't have enough liquid capital to do so. The company may be able to get more favorable terms on an acquisition loan because the assets being purchased have a tangible value, as opposed to capital being used to fund daily operations or release a new product line. This is because a tangible asset can be used as collateral for the loan. If the borrower defaults on the loan, the lender can reclaim the asset that was purchased with the funds and then liquidate the asset to cover the unpaid portion of the loan.
Example of an Acquisition Loan
For example, XYZ Company manufactures widgets and needs a new widget press. They don't have enough capital to make the purchase outright and would like to buy the equipment rather than lease it. They can apply for an acquisition loan from a lender such as a bank for the specific purpose of purchasing the press.