The basic definition of an acquisition loan is the kind of loan that gives a company the funds necessary to make a purchase. The type of investment depends on the company’s activity, however, and like that, we have different types of acquisition loans for different types of acquisitions. An acquisition loan can apply to a real estate developer or investor interested in purchasing a property, a company interested in acquiring another company, or many other kinds of acquisitions.
Usually, an acquisition loan can be used for a limited period of time. This type of loan can not cover other expenses as it is constrained and restrictive. In case the borrowing company uses the acquisition loan for different purposes, and outside the allotted time than what is specified within the contract, the loan is blocked. If all goes well with the loan, once it’s paid back, the funds are no longer available, unlike with a line of credit, home equity line of credit (HELOC).
Acquisition loans are used when a company decides to acquire a company or an asset but does not have sufficient funds for the purchase. Through an acquisition loan, the financial institution uses the asset as collateral as they have a tangible value. In case the company defaults on the loan, the financial institution can recover the asset and liquidate it to cover its expenses.
For companies’ acquisitions, the acquisition loan needs further investigation, even if it is among the easiest ways to access funds in a short period of time. Because of the less tangible value of a company, when an acquisition loan is used for this purpose, the acquiring company needs to make sure the target’s company assets can cover the loan in case of default, or if the assets of both target and purchasing company can cover the loan.
As mentioned before, acquisition loans are used by real estate investors, but also by developers. With an acquisition loan, investors or developers can purchase an existing property or development land. All types of acquisition loans are very limited. Unless it is directly specified in the contract, the funds from an acquisition loan can not cover anything other than the actual purchase price. Because of this, real estate investors and developers need additional loans or available funds for repairs, development, or management of the property.
From all the loans available for real estate investors and developers, this is the most limited option. Another option mainly for real estate developers would be the development loan while the most versatile being the acquisition and development loan.