When it comes to big-ticket items, there are two main types of financing that businesses can use: acquisition finance and leveraged finance. Both have their advantages and disadvantages, so it’s important to understand the difference between the two before making a decision.
Acquisition finance, also known as leveraged finance, is a type of funding used to finance the purchase of a company or asset. Unlike traditional forms of financing, acquisition finance is typically provided by a private equity firm or hedge fund.
This type of financing is typically used when the buyer does not have the full amount of cash required to purchase the company or asset outright.
Instead, they will take out a loan from the lender and use the assets of the company or asset as collateral. This can be a risky form of financing for both the lender and the borrower, as it can lead to default if the borrower is unable to make their loan payments. However, it can also be a very effective way to finance a large purchase.
Difference between acquisition finance and leveraged finance
Both acquisition finance and leverage finance come with a number of differences, these can be found here:
Acquisition finance is typically used to fund the purchase of another business or a major asset, such as a factory or piece of equipment. The main advantage of this type of financing is that it can be structured in a way that minimises the amount of risk for the borrower. For example, the loan can be secured by the asset being purchased, which means that if the borrower defaults on the loan, the lender can take possession of the asset. However, acquisition finance can be expensive and difficult to obtain, especially for small businesses.
Leveraged finance, on the other hand, is typically used to fund investments or expansion projects. The main advantage leverage financing is that it can provide a business with a significant amount of capital without requiring collateral. This makes leveraged finance ideal for businesses that don’t have any valuable assets to use as collateral. However, because there is no collateral securing the loan, leveraged finance is much riskier for lenders and therefore can be more expensive for borrowers. In addition, leveraged finance can be difficult to obtain if a business doesn’t have a strong credit history.
Leveraged and acquisition finance differences
One key difference between leveraged and acquisition finance is the way in which debt is used. In leveraged finance, debt is used to provide funding for a company’s operations or expansion.
In acquisition finance, meanwhile, debt is used to purchase another company. This can be done through a leveraged buyout (LBO), in which a company takes on debt to purchase another company, or through a merger or acquisition, in which two companies combine their operations. Another key difference between the two types of finance is the way in which they are structured.
Leveraged finance is typically structured as a term loan, while acquisition finance is typically structured as a bridge loan. This means that leveraged finance has fixed repayment terms, while acquisition finance does not. Finally, leveraged and acquisition finance differ in the way they are regulated. Leveraged finance is regulated by the Securities and Exchange Commission (SEC), while acquisition finance is not.
Read more: What are Mergers and Acquisitions
Conclusion
As anyone in the business world knows, there are many different types of financing available for companies looking to grow or make acquisitions. Two of the most popular options are acquisition finance and leveraged finance. So, which is the better option?
There are a few key considerations to keep in mind when making this decision. First, acquisition finance is typically used for larger transactions, while leveraged finance can be used for smaller transactions. Second, acquisition finance is typically used for more strategic acquisitions, while leveraged finance is often used for more opportunistic acquisitions. Third, acquisition finance usually involves a higher degree of financial risk than leveraged finance.
Ultimately, the answer to this question depends on the specific circumstances of each company. If a company is looking to make a large, strategic acquisition, then acquisition finance may be the better option. However, if a company is looking to make a smaller, more opportunistic acquisition, then leveraged finance may be the better choice. As with any business decision, it is important to careful consider all options before making a final decision.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.