What is one key characteristic of debt financing in acquisitions?

One key characteristic of debt financing in acquisitions is that it often comes with higher interest rates. When a company borrows money to finance an acquisition, lenders assess the risk associated with the loan. Since acquisitions can be inherently risky—especially if there is uncertainty regarding the future performance of the acquired company—lenders typically charge higher interest rates to compensate for that risk. This is particularly relevant when the borrowing company may already be leveraging their balance sheet or when the target company is in a volatile or declining market.

Higher interest rates on debt financing can impact the overall cost of capital for the acquiring firm and influence its financial strategy. It is important for finance professionals to understand this relationship, as it affects cash flow projections, financial stability, and the return on investment for the acquisition. In contrast, options that pertain to unsecured loans, reduction of the overall acquisition cost, or a blanket preference for debt over equity do not capture the typical nature and cost implications of debt financing in this context.