Why Cash Flow Stability Determines the Cost of Acquisition Financing
Posted on: January 19th, 2026
Understanding the cost of acquisition financing leads to misguided comparisons and ill-informed views. Deal world participants are so focused on the nominal cost of interest; they end up comparing apples to oranges.
Acquisition financing is naturally more expensive than most loans due to its higher value for the borrower. Cash flow stability is the primary driver for the cost of acquisition financing. More cash flow stability causes less risk for the lender allowing them to reduce their risk premium of a loan default.
At the most fundamental level, acquisition financing lenders need steady cash flow performance to ensure the principal and interest requirements of their loans can be met. While most acquisition financing lenders are supported by private equity groups in their deals, many credit funds lend directly to companies for roll-ups and recapitalization. Their loan amounts are determined by measurement of historical EBITDA and cash flow.
Cash Flow Stability and Acquisition Financing Economics
Strong cash flow is a prime indicator of a high-quality business endowed with a number of undeniable strengths. These companies generally have high margins, diverse customer bases, and high share of wallet. These companies present a lower risk profile of default allowing the lender to price more aggressively.
Companies that show strong cash flow year-in and year-out have cash flow consistency which is prized by acquisition financing lenders. These companies usually have capital efficient business models that do not consume large amounts of capital expenditure or working capital in order to grow.
These companies get the best rates as they are viewed as less risky than other more cash flow volatile businesses. Their capital efficiency allows them to pay down debt simultaneously while reinvesting internally on a modest scale.
Conceptually this is steady-Eddie type business in a mature industry not subject to rapid change. The less lumpy, the more consistent, the better the cost of acquisition financing.