Yes, but mostly for working capital, not purchase price. In a typical acquisition the term loan, seller financing and buyer equity pay the seller. A revolver closes alongside them to fund payroll, receivables and inventory once the buyer takes over, with at most a small draw at closing for fees or an opening cash balance. Lenders usually require a minimum of unused availability right after closing. Drawing the line to plug a gap in the purchase price leaves no room for the working capital swing that follows, which is when newly acquired businesses most often run short.
- Main job
- Working capital after closing: payroll, receivables, inventory
- Draw at closing
- Usually small: fees, an opening cash balance, a seasonal build
- Lender condition
- Minimum excess availability after the closing draw
- Who pays the seller
- Term loan, seller note and buyer equity, not the revolver
- Main risk
- A line drawn to close has no room for the first working capital swing
Why the business needs a line on day one
Most acquisitions close cash-free and debt-free. The seller keeps the cash in the bank and pays off the company's debts, including its line of credit, out of the proceeds. The buyer inherits receivables, inventory and payables, and an operating account with very little in it.
The working capital peg protects the buyer from receiving less than a normal level of working capital. It does not deliver cash. Normal working capital is receivables that will be collected over the coming weeks and inventory that will be sold over the coming months. Payroll is due on Friday.
So the business needs a source of liquidity from the first day it is under new ownership. That is the revolver's job: to carry the gap between paying suppliers and staff and being paid by customers, as it would in any business, starting from a standing start. Working capital at close covers how buyers and lenders size that need.
The peg delivers normal working capital. The revolver turns it into cash. A buyer needs both on the day of closing.
Where the revolver sits in sources and uses
In a well-built structure, the revolver appears in the sources and uses as a small draw, and most of its commitment sits unused for the months ahead. An illustrative example:
| Sources | Amount | Uses | Amount |
|---|---|---|---|
| Senior term loan | 6,000 | Purchase price | 9,600 |
| Seller note | 1,500 | Closing costs and lender fees | 400 |
| Buyer equity | 2,500 | Opening cash balance | 300 |
| Revolver draw at closing | 300 | ||
| Total | 10,300 | Total | 10,300 |
Here the revolver has a commitment of 2,000, and the target's receivables and inventory support a borrowing base of 1,800 on the day of closing. After the closing draw of 300, the business starts with 1,500 of excess availability. The purchase price is paid entirely from permanent capital: the term loan, the seller note and the buyer's equity.
The term loan and the revolver may come from the same lender under one agreement, or from two lenders, with an asset-based lender holding first lien on receivables and inventory and a term lender holding the rest. How an ABL and a term loan share collateral explains that second arrangement.
The minimum availability test at closing
Lenders financing an acquisition usually make it a condition of closing that the business has a minimum amount of excess availability left once everything is funded. The threshold is set deal by deal, as a fixed amount or a share of the borrowing base, and it appears in the commitment letter. The test has three features buyers often miss:
- It is measured after everything. After the closing draw, after fees and closing costs, and often after any purchase price the buyer expected the line to cover.
- Payables count against it. Many lenders measure availability as if payables beyond their normal terms had been paid. A seller who stretched vendors before closing to show a better working capital figure can shrink the buyer's availability on the first day.
- The borrowing base must exist before closing. An asset-based lender needs a field exam on the target's receivables and, where inventory is in the base, an appraisal. Those need the target's own aging and inventory data, which means the seller's cooperation well before the closing date.
The test is the lender's way of making sure the business does not start life under new ownership already stretched. It is also a useful discipline for the buyer. If the structure only closes by using up the line, the structure is short of permanent capital, and the fix belongs in the term loan, the seller note or the equity.
What goes wrong when the line pays the seller
Suppose the same deal comes up 1,000 short of equity, and the buyer closes the gap by drawing 1,300 on the revolver at closing instead of 300. Everything else is the same. Then, in the first quarter, a large customer pays late under the new owner and the business builds inventory for its busy season. Working capital needs rise by 800.
| Plan: 300 drawn at closing | Gap plugged: 1,300 drawn at closing | |
|---|---|---|
| Borrowing base at closing | 1,800 | 1,800 |
| Drawn at closing | 300 | 1,300 |
| Excess availability after closing | 1,500 | 500 |
| Working capital swing in the first quarter | 800 | 800 |
| Availability at the low point | 700 left | Short by 300 |
In the second case the business cannot fund the swing. It stretches suppliers, asks the lender for an over-advance, or misses payroll, in the first months of new ownership, when customers, staff and suppliers are all watching for signs of trouble.
The real picture is usually worse than the example. The borrowing base often shrinks after a change of ownership: some customers slow their payments while they get used to the new owner, receivables past 90 days fall out of eligibility, and a customer that crosses the concentration limit drops part of its balance from the base. A line drawn to the edge at closing has nothing to absorb any of it.
There are structural costs too:
- The debt never comes down. Purchase price drawn on a revolver is permanent capital with no amortization. It sits on the line indefinitely, and a lender with an annual clean-up period will find a line that can never be cleaned up.
- Leverage is higher than it looks. Revolver draws count as funded debt in leverage tests. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA in total, revolver included, so a large closing draw uses capacity the term loan was sized on.
- It may not be allowed. Many credit agreements limit revolver proceeds to working capital and general purposes, and a lender that sees the line funding the purchase will size the term loan accordingly or decline the structure.
Purchase price is permanent capital. A revolver is meant to go up and down. When it funds the first, it can no longer do the second.
SBA acquisitions and the line of credit
On an SBA 7(a) acquisition, working capital can be included in the loan itself, with a maturity of up to 10 years, and a separate working capital line can sit alongside, either a conventional line or an SBA CAPLines line. Two SBA rules bear on how the revolver is used:
- The equity injection must be real. For a complete change of ownership SBA requires an injection of at least 10% of total project costs. A draw on the acquired company's own line is the business borrowing, not the buyer investing, so it cannot stand in for that injection. See how much equity you need.
- Coverage includes the line. SBA requires debt service coverage of at least 1.15x, and from 1 October 2026 a change of ownership must show 1.25x on historical results. Interest on the revolver is part of the debt service the lender tests.
Who provides the line, and what happens to the seller's
The seller's existing line almost never survives the sale. A change of ownership is usually a change-of-control default under the seller's credit agreement, and a cash-free, debt-free deal repays it at closing through a payoff. The buyer arranges a new line as part of the acquisition financing, on the buyer's structure.
The usual options are the senior term lender providing the revolver in the same agreement, an asset-based lender providing it beside a separate term lender, or an SBA lender pairing the 7(a) loan with a working capital line. For a buyer planning further purchases, a revolver is the wrong tool for those too: a delayed-draw term loan funds add-ons with permanent, amortizing debt and leaves the line for operations.
Sizing the line and preparing the file
Size the commitment from a monthly working capital forecast for the first year after closing, not from the seller's old line. Find the low point, when receivables and inventory peak against payables, and set the commitment to cover it with room to spare. Then check that the target's collateral will support a borrowing base that large. Sizing a working capital line sets out the method.
A lender underwriting the revolver in an acquisition asks for the standard line-of-credit file on the target, plus the acquisition documents:
- Receivables aging by customer, with days outstanding
- Payables aging
- Balance sheet, and profit and loss statement
- Year-to-date profit and loss through last month-end, where available
- Debt schedule and UCC position, showing existing liens to be paid off
- Inventory report, if inventory is part of the borrowing base
- The target's latest full year of figures, never an older year
- The letter of intent
Transparent's lender package includes a financing model that projects the borrowing base and revolver usage month by month after closing, so a lender sees the availability test passed on day one and the low point covered, rather than taking it on trust. The book holds 235 lenders that write asset-based loans and lines and 1,148 that write term and private credit, which allows the revolver and the term loan to be placed together or separately, whichever fits the deal.
Common questions
- Can I use a line of credit for the down payment on a business?
- Not the acquired company's line. Lenders want the buyer's equity to come from outside the business, and SBA will not count a draw on the company's own line toward the equity injection.
- Will the seller's line of credit transfer to me?
- Rarely. A sale is usually a change-of-control default under the seller's agreement, and cash-free, debt-free deals repay the line at closing. The buyer arranges a new line as part of the acquisition financing.
- How much availability do lenders want at closing?
- It is set deal by deal, as a fixed amount or a share of the borrowing base, and written into the commitment letter. The lender measures it after the closing draw and fees, and often after bringing stretched payables back within terms.
- Does a revolver draw count toward leverage?
- Yes. Drawn revolver balances are funded debt in leverage tests, so a large draw at closing uses capacity the term loan was sized on and can tighten covenants from the start.
- Can I use the revolver for later add-on acquisitions?
- Some agreements allow small permitted acquisitions funded from the line, subject to conditions. Larger add-ons are usually better funded with a delayed-draw term loan, which keeps the revolver free for working capital.