Acquisition Loans

An acquisition loan is a loan that's given to a company to purchase a specific asset, to acquire another business, or for other reasons that are laid out before the loan is granted. Typically, a company can only use an acquisition loan for a short window of time and only for the agreed upon purpose. An acquisition loan is a loan that allows a company to purchase an asset or to acquire another company. There are set rules on what an acquisition loan can be used for as well as the time in which it can be used. There are many different types of acquisition loans, such as startup loans, SBA loans, equipment financing, and business expansion loans.

An acquisition loan is sought out when a company wants to acquire an asset or company 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 to release a new product line.

The 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. When an acquisition loan is applied for and approved, it 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. In this way, it is different from a line of credit. .

Acquisition loans can also be used for the purchase of another company. In this instance, the acquiring company has to determine if the target company's assets constitute adequate collateral to cover the loan needed for its purchase. It must also determine whether the combined businesses can generate enough cash to pay off the loan, both the principal and the interest. Sometimes, when an acquisition is particularly large and complicated, an investment bank, law firm, and third-party accountant work together on the structure of the loan to make sure it is properly structured.