Acquisition loans are sought when a company wants to complete an acquisition for an asset but doesn’t have enough liquid capital to do so. The amount of financing you get with acquisition loans depends on the business you’re buying. The rate you’ll get depends on your qualifications.
Acquisition loans can be used by a company to purchase an asset or for another specific purpose. 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. Once repaid, funds available through an acquisition loan cannot be reborrowed as with a revolving line of credit at a bank.
Acquisition loans are the capital that is obtained for the purpose of buying another business. Acquisition financing allows the user to meet their current acquisition aspirations by providing immediate resources that can be applied toward the transaction.
There are several different choices for a company that is looking for acquisition loans. 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.
An acquisition or takeover is the purchase of one business or company by another company or other business entity. Specific acquisition targets can be identified through a myriad of avenues including market research, trade expos, or sent up from internal business units, among others.
Such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. Consolidation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently. Acquisitions are divided into “private” and “public” acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy. An additional dimension or categorization consists of whether an acquisition is friendly or hostile.
Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful. Serial acquirers appear to be more successful with M&A than companies who only make an acquisition occasionally.
Most commercial banks are reluctant to offer loans to people who want to buy a business unless the loan is guaranteed by the Small Business Administration (SBA). Because the SBA provides very solid guarantees, banks can reduce their risk and receive an incentive to make otherwise “risky” loans. However, the SBA guarantee is considered a last resort as far as collections are concerned. Banks have to ensure that the loan can be paid by the business or the borrower. Banks are the first line of collections. The bank can collect on the SBA guarantee only if it’s not able to recover funds from the business or the owners’ personal assets. As a result, you need to be ready for the bank’s underwriting process.
An acquisition is a corporate action in which one company buys most or all of another company’s shares to assume control. An acquisition occurs when a buying company obtains more than 50% ownership in a target company. As part of the exchange, the acquiring company often purchases the target company’s stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders.
Companies perform acquisitions for various reasons. They may seek to achieve economies of scale, greater market share, increased synergy, cost reductions, or new niche offerings. If they wish to expand their operations to another country, buying an existing company may be the only viable way to enter a foreign market, or at least the easiest way: The purchased business will already have its own personnel (both labor and management), a brand name, and other intangible assets, which helps to ensure that the acquiring company will start off with a solid customer base.
Acquisitions often become a part of a company’s growth strategy when it is more beneficial to acquire an existing firm’s operations than it is to expand its own. Sometimes expanding compromises efficiency. Whether because the company is becoming too bureaucratic or it runs into physical or logistical resource constraints, eventually its marginal productivity peaks. To find higher growth and new profits, the large firm may look for promising young companies to acquire and incorporate into its revenue stream.
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.
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