What is an Acquisition Loan?

An acquisition loan is type of business loan that is granted for a specific purpose. That purpose may be the purchase of a particular asset, such as property or manufacturing equipment, or any other business related purpose that is deemed appropriate by the lender. Typically, acquisition loans are structured so the balance is retired in a relatively short period of time. Unlike a revolving credit line, it is not possible to reborrow funds from an acquisition loan once it is repaid in full. In order to obtain additional financial assistance, the borrower will have to apply for a new loan.

A business is likely to seek an acquisition loan when there is a need to acquire a specific asset, but the current amount of cash on hand is not sufficient to manage the purchase. Since loans of this type are often granted so the debtor can purchase property or some type of tangible asset with a current market value, it is not unusual for that asset to be utilized as collateral for the loan. Doing so can often make it possible to obtain a more competitive rate of interest, which is appealing to the borrower. At the same time, the collateral helps to reduce the risk assumed by the lender, since the asset can be seized and sold in the event that the debtor defaults on the loan.

In many situations, a borrower will seek to secure an acquisition loan when the expectation is that the asset acquired will shortly begin to aid in the production of revenue. This is important, since loans of this type are usually written so they are retired in a relatively short period of time. Assuming the asset does help increase production directly or indirectly, the borrower can easily meet payments on the loan as they come due. Depending on how much additional revenue is generated, it may be possible to retire the acquisition loan early and minimize the amount of interest that is due on the loan balance.

Land developers often make use of acquisition loans as part of the overall strategy to developing a parcel of land for resale. For example, the developer may utilize an acquisition loan to purchase a tract of land that is considered ideal for the development of a new residential area. Once the land is purchased, the developer proceeds to secure a construction loan to aid in the expenses associated with building the new homes. As the completed homes are sold, the developer can then retire both loans and keep the remaining profits from the sales as profit.