- September 2, 2020
- Posted by: admin
- Category: investment
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 to the transaction.
here are several different choices for a company that is looking for acquisition financing. The most common choices are a line of credit or a traditional loan. Favorable rates for acquisition financing can help smaller companies reach economies of scale, which is generally viewed as an effective method for increasing the size of the company’s operations.
A company seeking acquisition financing can apply for loans available through traditional banks as well as from lending services that specialize in serving this market. Private lenders may offer loans to those companies that do not meet a bank’s requirements. However, a company may find that funding from private lenders includes higher interest rates and fees compared to bank financing. A bank might be more 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.
Depending on the size of the businesses involved and the nature of the acquisition, there may be financing options through the Small Business Administration (SBA). 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% 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.
A company may use debt security, such as issuing bonds, as a means of financing an acquisition. In many cases, a company may find that selling bonds on the open market offers them advantages over seeking funding from a bank or private lender. Banks generally have covenants or rules regarding their funding that companies find restrictive and expensive. Because of this, companies turn to the bond markets as an alternative source for financing mergers and acquisitions.
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.