Loan Options:

ASSET ACQUISITION

• Asset Acquisitions

• Full Book Buyout

• Partial Book Buyout

• Practice Acquisition

• Partial Asset Acquisition

• Asset Tranche Purchases

EQUITY PURCHASE

• Equity Acquisitions

• Complete Stock Purchase

• Partnership Equity Buy-in

• Partnership Equity Buy-out

• Succession Equity Tranches

• Merger Equity Equalization

RECRUITING PURPOSE

• Recruiting Bonus

• Transition & Retention

• Refi Current BD Notes

• Recruiting to Acquisition

• Recruiting Infrastructure

• Service Advisor Recruiting

DEBT REFINANCE

• SBA into Conventional

• Conventional into SBA

• Seller Promissory Notes

• Broker Dealer Notes

• When Required Because of Lien

WORKING CAPITAL AND LINES

• Working Capital

• Expansion Capital

• SBA Credit Line

• Revolving Bank Line

• 1-3 Year Bridge

COMMERCIAL REAL ESTATE

• Purchase Office Building

• Property & Construction

• Investment Property

• Leasebacks

• Commercial RE Refi

Debt Service Coverage Ratio (DSCR)

The debt service coverage ratio (DSCR) is critical to loan approval.

This ratio is a reflection of available free cash flow after paying all expenses and debt service payments.

For startups this is based on projections. For purchasing a business this is based on the combined profit of the buyer and seller. This ratio is a reflection of available free cash flow after paying all expenses and debt service payments.

This is how it is calculated: Annual EBITDA / Annual Debt = DSCR

Maximum Loan Amount

Once the DSCR is established, the maximum loan amount comes into view. The calculation is simple: EBITDA / DSCR = Maximum Annual Debt Service. However, the minimum acceptable DSCR can vary. Startups rely heavily on projections, with the loan amount depending on carefully selected DSCR values, such as 1.15, 1.25, or 1.50. For existing businesses and acquisitions, higher profitability allows for more leniency. The optimal loan amount is determined by dividing the combined EBITDA by the required DSCR values, such as 1.50 or 1.75.

Debt and Debt-to-Income Ratio (DTI)

Banks go the extra mile to examine the borrower's personal financial health. Some employ the same DSCR methodology used for the business, evaluating personal cash flow and debt obligations. Others use the DTI = Personal Annual Debt Service / Total Personal Income. Typically, banks look for values under 30%-40%.

Net Worth

While there is no set net worth-to-loan ratio, net worth plays a significant, yet understated, role in the loan approval process. A strong net worth, evidenced by retirement accounts, home equity, and investments, instills confidence and reduces perceived risks, especially in the case of startups. Conversely, a low net worth may necessitate down payments, even when they are not officially required.

Navigating Personal Debt to Income Ratios

In light of the shifting lending climate towards cash flow as the main qualifying metric, a thorough understanding of personal debt to income ratios becomes pivotal for financial advisors seeking loans. Essentially, the ratio compares an individual's debt payments to their overall income—a lower ratio indicates a stronger position to manage additional debt comfortably. Conventional lenders frequently allot a maximum acceptable threshold of 30% to 40% in debt to income, ensuring that a potential borrower is not over leveraged. Within this framework, it’s critical for advisors to maintain their personal finances judiciously, reflecting financial prudence to lenders. Coupled with a solid business Debt Service Coverage (DSC), a favorable personal debt to income ratio can tip the scales in the advisor’s favor, capacitating them to secure the necessary funding for practice expansion or acquisitions.

Personal Financial Statements

Transitioning from industry stability to the individual level, it's pivotal to understand that the Personal Financial Statement (PFS) is often the first checkpoint for lenders in evaluating a loan application. A robust PFS amplifies the prospects of securing a loan since it provides a comprehensive snapshot of an applicant's net worth, liabilities, and assets.

For conventional loans, the PFS is part and parcel of the loan application. However, when it comes to Small Business Administration (SBA) loans, the SBA 413 Form is the norm. Lenders instinctively skim to the bottom of the PFS to ascertain the net worth figure—a paramount indicator of financial health. They then dissect the list to assess debt and asset details, examining the proportions meticulously.

While a substantial personal net worth can color the lender's perception positively, it's crucial to recognize that net worth alone doesn't guarantee loan approval. There are cases where advisors with hefty net worths may struggle to secure a substantial acquisition loan, while those with more modest net worth figures might succeed. It emphasizes that net worth is a nuanced consideration with no concrete personal net worth-to-loan amount ratio.

Conventional lenders typically look for a net worth that's about 25% to 50% of the loan value, not counting the advisory business's value, whereas SBA lenders apply more flexibility due to the SBA's guarantee safeguard. What's clear, however, is that lenders view personal financial assets—including retirement accounts and personal investments—as positive indicators of an applicant's financial stability, though these assets are generally non-collateral.

Lenders also weigh an advisor's professional experience in conjunction with their net worth. An advisor with extensive experience but a modest net worth might be assessed differently compared to someone newer to the industry with similar financial standing.

It's no secret that not every financial advisor manages their personal finances with the same acumen they recommend to their clients. Nevertheless, the vast majority of advisors find a path to loan approval, be it through SBA or conventional means, underscored by a variety of structured financing options. Such flexibility acknowledges the dynamic nature of the financial industry and the specialized risk assessment accorded to financial advisors, often leveraging cash flow over tangible collateral.

Loan to Value (LTV)

While the SBA hasn’t set hard and fast rules for Loan-to-Value (LTV) ratios, many of its lenders implement internal LTV policies to manage risk. These internal policies typically cap LTV at 90% for SBA loans. In contrast, conventional lenders have a narrower window, with maximum LTV requirements typically falling between 75% and 85%. This variance in LTV policies can be a decisive factor in a financial advisor's loan application outcome: one lender might extend 100% bank financing, while another may necessitate a down payment, or require a portion of the purchase price to be financed by the seller.

Loan Term Options

Standard acquisition loans have 10 year terms:

Both conventional and SBA 7(a) acquisition loans have 10 year terms. Most acquisition loans in wealth management industry lending are done as 10 year term loans with a matching 10 year amortization.

10 year term with 15 year amortization:

10 year term but payments are made based on a 15 year amortization. At the end of the 10 years there is a balloon payment. The balloon payment is made in one lump sum or if everything qualifies, be refinanced into a new note. This loan lowers monthly payments over a 10 year amortization by 23.2%. More details at the bottom of this page.

Commercial real estate up to 25 year term :

Advisors can purchase their office building/condo with a 25 year term. If you are combining an acquisition with an office building and the real estate portion is at least 50% of the loan amount then you can also get a 25 year term. If the real estate portion is less than 50% the entire loan can extend out up to 17 years. See Commercial Real Estate portal page for more details.

5 and 7 year term options:

Most conventional lenders are happy to do 5 or 7 year term loans and will typically give a small rate discount (like 25 basis points). Only a small minority of advisors opt for these shorter amortizations because of the impact to cash flow from the significantly higher monthly payments.

INTEREST RATES

Interest Rate Review:

Currently the prime rate is at 8.50%. In 2022 the Fed raised rates 7 times bringing the prime rate from 3.5% in Q1 2022 to 7.5% mid-December 2022.

Fixed and Variable Rate Options:

Both fixed and variable rates are available with both conventional and SBA loans. Usually, most all conventional loans are fixed and most all SBA 7(a) loans are variable. However, a conventional lender will typically provide a better rate when set at variable instead of fixed and an SBA lender will typically charge the maximum rate allowed if set at fixed instead of variable.

Base Rate and Spread:

- General guideline to ball park interest rate expectations:

Most conventional lenders will base their rate spread for most loans between 3% and 4% over the 10 Year Treasury rate.

- Most SBA lenders will base their rate spread for most loans between 2% and 2.75% over the Wall Street Prime (WSP) rate.

- There are conventional lenders that will use WSP rate instead of the 10 Year Treasury. SBA puts a cap on the rate spread a lender can charge. For SBA 7(a) loans the maximum spread is 2.75% over the WSP rate regardless if the rate is fixed or variable. Some SBA lenders will go lower than 2% spread and some conventional lenders will go as high as a 4% spread on specific deals they feel warrant it.

As a general rule, lenders with narrow qualifying criteria will have slightly better rates than lenders with wider qualifying criteria.

Wall Street Prime Rate:

The Wall Street Prime rate is the base rate used by SBA lenders and some conventional lenders.

10 Year Treasury Rate:

The 10 Year Treasury rate is the base rate used by most conventional lenders.

SBA Loan Interest Rates:

SBA loan interest rates are typically based on the prime rate currently at 8.50% plus the bank spread. The SBA puts caps on the spread based on if the loan is variable or fixed, the program, and the loan amount. Depending on the type of loan and amount currently rates can range from the mid 9% range to the mid 11% range.

Business Loan Liens

What does it mean to have a UCC lien?

The lender will file a UCC-1 blanket lien against your business for all current and future business assets.

Securing a business loan often involves collateralization, providing lenders with assurance in case of repayment default. One common tool for securing business loans is a Uniform Commercial Code (UCC) lien. This report delves into the intricacies of UCC liens, explaining their function, implications for businesses, and key considerations for borrowers.

What is lender lien position?

Lenders generally require to be in first lien position but only one lender can be. If a different lender is needed (or wanted) for your second loan, they will typically refinance your existing loan and roll it into the new loan. This places the new lender in first lien position.

What is a UCC Lien?

A UCC lien is a legal document filed with the state government, granting the lender a security interest in specific business assets. Think of it as a claim on those assets, allowing the lender to seize and sell them to recoup outstanding loan obligations in case of default.

What Assets Can Be Subject to a UCC Lien?

The scope of assets covered by a UCC lien varies depending on the loan agreement and lender's requirements. Typical assets include:

Inventory: Merchandise, raw materials, finished goods

Equipment: Machinery, tools, computers

Accounts receivable: Outstanding customer invoices

Intellectual property: Trademarks, copyrights, patents

Real estate: Property owned by the business

What are the Implications for Businesses?

Be aware of the implications of UCC liens:

Limited Access to Other Financing: Other lenders might be hesitant to offer loans with secured assets already pledged to another creditor.

Potential Impact on Credit Score: Publicly filed UCC liens can negatively impact a business's credit score, affecting future borrowing ability.

Restrictions on Asset Disposing: Selling or transferring any asset subject to a lien generally requires the lender's approval.

SBA COLLATERAL REQUIREMENTS

SBA collateral rules aren't as straightforward as simply having enough assets to pledge. There's a mix of regulations and lender discretion involved, aimed at balancing risk mitigation with access to capital for diverse businesses.

An SBA loan request is never declined solely on the basis of inadequate collateral. In fact, one of the primary reasons lenders use the SBA program is for those applicants that demonstrate repayment ability but lack adequate collateral to repay the loan in full in the event of default.

A loan request is not to be declined solely on the basis of inadequate collateral. In fact, one of the primary reasons Lenders use the SBA-guaranteed program is for those Applicants that demonstrate repayment ability but lack adequate collateral to repay the loan in full in the event of default. However, SBA does not permit its guaranty to be a substitute for available collateral.

While the Small Business Administration (SBA) doesn't dictate specific collateral requirements for its loan programs, it does influence lender policies through its guarantee programs. This means lenders have some flexibility in determining what collateral they require, making the actual requirements you face a bit more nuanced.

Collateral for SBA 7(a) Loans

For Standard 7(a) loans, the Small Business Administration (SBA) deems a loan as "fully secured" when these conditions are met: all assets being acquired, refinanced, or improved with the loan are security-interested, and fixed assets of the applicant with a combined Net Book Value, as adjusted below, amount to the loan sum. The term "fixed assets" refers to real estate, machinery, and equipment owned by the business.

The valuation of these assets follow these rules:

New machinery and equipment (excluding furniture and fixtures) should be valued at a maximum of 75% of their price without previous liens for the calculation of being "fully secured".

Used or existing machinery and equipment (excluding furniture & fixtures) should be valued at a maximum of 50% of Net Book Value or 80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of "fully secured".

Improved real estate can be valued at a maximum of 85% and unimproved real estate at 50% of the market value for the calculation of “fully secured”.

Furniture and Fixtures can be valued at a maximum of 10% of Net Book Value or appraised value.

In cases where collateral shortfall exists, the lender must take available equity in the personal real estate of any owners of the applicant and guarantors who own 20% or more, except Supplemental Guarantors. Liens on personal real estate may be limited to the amount of the collateral shortfall. Additionally, trading assets could be included as necessary (using no more than 10% of the current book value for the calculation).

The SBA does not necessitate a lender to collateralize a loan with real estate when the equity in the real estate is less than 25% of the property's fair market value. The lender is required to document the source used for determining less than 25% equity in their loan file.

When loan proceeds from a Standard 7(a) Loan will be used to acquire, refinance, or improve assets, a first security interest in those assets must be obtained. For loans collateralized by commercial real estate that was acquired, refinanced, or improved, lenders must obtain an appraisal that complies with real estate appraisal and business valuation requirements.

When is personal collateral potentially required?

The SBA does not require borrowers to have equity in a house/property to qualify, but if the borrower does have such equity an SBA lender may have to use it for collateral if certain conditions exist.

The SBA does not require lenders to collateralize the loan with personal property if the borrower has less than 25% equity of fair market value.

It is an SBA requirement that for loans over $500K, if you have 25% equity in any personal real estate, including residential and investment property, that it be required as collateral, up to the full loan amount.

If a borrower is considering an SBA loan for more than $350K and has 25% or more equity in their home then getting a HELOC in place can bring the equity available to under 25% and therefore avoid a junior lien being placed on their home by the SBA lender.

The SBA has clearly defined personal property lien requirements

For loans over $500,000 the SBA requires that a lien be placed on available equity of the borrower’s personal real estate including residential and investment property if the equity is 25% or more of fair market value.

The SBA does not require lenders to collateralize a loan with personal property if the borrower has less than 25% equity of fair market value.

Real estate can be valued at 85% of the market value for the calculation of “fully-secured.”

SBA does not require a lender to collateralize a loan with a personal real estate to meet the “fully secured” definition when the equity in the real estate is less than 25% of the property’s fair market value. However, an SBA lender is not prohibited from doing so.

Assets Owned by the Business and Spouse

When an individual alone or together with his or her spouse owns 20% or more of the business, the lender must consider taking as collateral a lien on personal real estate (investment or residential) that is owned individually by the applicant owner, or jointly owned by the individual and his or her spouse.

Mitigating collateral requirements:

Real estate transferred by the applicant to a spouse or minor children within six months of the date of the application will not be exempt from consideration as available collateral.

If you take a HELOC before you officially apply for your SBA business loan, and the mortgage plus the HELOC leave you with less than 25% equity in your house or investment properties, then a lien will not be required.

Liens on a personal residence or investment property may be limited to 150% of the equity in the collateral, if there are tax implications associated with the lien amount in the particular state where the lien is filed.

Will a HELOC prevent a property from being collateral?

Any amount taken out in a Home Equity Line Of Credit is deducted from the 25% equity rule. If the property with a HELOC is being collateralized, then the SBA lender would be in third lien position, with the mortgage in first, and the HELOC in second.

How would a house lien impact ability for a future HELOC?

You can refinance a collateralized house but no cash out refis are allowed. While you can keep any existing HELOC in place, you would not be able to get a new HELOC after the SBA loan is funded.

Can I use securities instead of property?

If you are required to use property as collateral then you could instead replace with securities only if the collateral would cover the full amount of the loan. Whole Life Cash Value and Marketable Securities can’t be used in lieu of a residence, unless it fully secures the loan amount.

What happens if I sell a collateralized property?

You would notify the lender of this. The process is that you sell the house and the mortgage lender gets paid off, your equity goes to the bank to be held in escrow, and they release the lien.

When you purchase another house/property this amount can be applied to your purchase and the lender will take a lien on the new house/property.

If the equity is not applied to another house/property then it has to be applied to the SBA loan balance.

Additional requirements if debt refinance

When loan proceeds from a an SBA 7(a) loan will be used to refinance existing debt, the loan must be secured with at least the same collateral and lien priority as the debt that is being refinanced. When the debt being refinanced is considered to be over collateralized based upon SBA collateral requirements and the SBA loan will remain fully secured, the Lender may approve the release of excess collateral. Substitute collateral may be offered providing it is of comparable value and useful life and is determined to be acceptable by SBA the SBA lender (See Debt Refinance page for more information).

Personal Guaranty & Guarantors

An Unlimited Personal Guaranty is where the borrower/guarantor is guaranteeing the entire outstanding loan amount plus legal fees, accrued interest, and costs associated with collecting on the loan.

Owners having 20% or more of the borrowing business must provide a personal guaranty. Lenders may require other individuals to guarantee the loan as well. The guaranty by owners of less than 20% may be limited or full.

Each loan necessitates at least one guarantor, whether individual or corporate. Should there be no individual or entity holding a minimum of 20% ownership in the applicant entity, at least one of the owners is mandated to provide an unconditional, full guarantee.

Guaranty Requirements:

• For a sole proprietorship, the sole proprietor.

• For a partnership, all general partners, and all limited partners owning 20% or more of the equity of the firm, or any partner that is involved in management of the applicant business.

• For a corporation, all owners of 20% or more of the corporation and each officer and director.

• For limited liability companies (LLCs), all members owning 20% or more of the company and each officer, director, and managing member

• Each loan must be guaranteed by at least one individual or entity. If no one individual or entity owns 20% or more of the Applicant, at least one of the owners must provide a full unconditional guaranty.

• Individuals who own 20% or more of an Applicant must provide an unlimited full guaranty.

• When ownership interest of an Applicant is held by a corporation, partnership or other form of legal entity, the ownership interests of all individuals must be disclosed.

Individual Guarantees:

Owners who hold a 20% or greater stake in an applicant entity are obligated to provide a full, unrestricted guarantee. In cases where the applicant's ownership is vested in a corporate entity, partnership, or any other legal entity, full disclosure of every individual's ownership interest is mandatory. Depending on the credit or other relevant factors, additional individuals or entities might be required to provide full or limited guarantees for the loan, irrespective of their ownership percentages. For all loan guarantors, the SBA lender must procure a personal financial statement, with an exception for 7(a) loans and 504 projects less than or equal to $500,000.

Spousal Guarantee:

In cases where a spouse owns less than 20% of an applicant entity, a full personal guarantee is mandatory when the combined ownership stake of both spouses and their minor children equates to or exceeds 20%. Non-owner spouses are required to sign the appropriate collateral documents. The guarantee of the spouse, secured by jointly held collateral, will be limited to the spouse's interest in said collateral.

Corporate, Trust, & Other Guarantees:

All entities with a minimum 20% ownership in an applicant entity are required to provide a full, unrestricted guarantee. If the owner is a trust (revocable or irrevocable), the trust should guarantee the loan, with the trustee signing the guarantee on behalf of the trust and providing required certifications. If the trust is revocable, the Trustor must also guarantee the loan.

Change of ownership:

Any individual who was subject to the guarantee requirements half a year prior to the date of the loan application is still required to comply with these requirements, even if they have reduced their ownership stake to less than 20%. The only exception applies when the individual has completely divested of their interest before the application date. Complete divestiture involves relinquishing all ownership stakes and severing all relations with the applicant (and any affiliated Eligible Passive Company), including employment (whether paid or unpaid).

Supplemental Guarantor:

This is a person or entity mandated by a Lender to provide a guarantee due to prudence and is not required by SBA Loan Program Requirements to provide a guarantee.

Reducing Ownership Interest:

For SBA loans, any person subject to the personal guaranty requirements six months prior to the date of the loan application would continue to be subject to the requirements even if that person has changed his or her ownership interest to less than 20%. The only exception to the six-month rule is when that person completely divests his or her interest prior to the date of application. Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the business in any capacity, including being an employee (paid or unpaid).

Substituting Guarantors:

With SBA approval, borrowers can now replace existing personal and/or corporate guarantors with qualified substitutes. This potentially offers greater flexibility for borrowers facing changes in business ownership or personal circumstances.

Conditions: Approval for substitution is contingent on several factors, including the good standing of the loan, the financial strength and eligibility of the proposed substitute guarantor, and the absence of adverse impact on the SBA's financial interests.

Original Guarantor Liability: The original guarantor may still be liable for certain obligations incurred before the substitution is approved.

SBA Guaranty Same as My Guaranty?

No. Anything about these being SBA guaranteed loans has nothing to do with your guaranty. The SBA guaranty is for the lender not the borrower.

If you default on the loan and the SBA pays the lender the guaranty, they will still be going after you for the full amount of the default or a negotiated payoff amount. The SBA guaranty is not for you. It is to cover the bank's losses, not yours. Keep in mind this happens only after other measures to avoid default have failed.

If your bank loan is 75% guaranteed by the SBA this does not mean if you default that you don't have to pay back 75% since it was guaranteed. The bank likely sells your debt to a collection agency type outfit that you'll have to contend with.

SBA Guaranty Documents Include:

• Personal Financial Statement on all owners of 20% or more (including the assets of the owner’s spouse and any minor children), and proposed guarantors.

• Business financial statements and/or tax returns. Documents include:

• Year End Balance Sheet for the last three years, including detailed debt schedule

• Year End Profit & Loss Statements for the last three years

• Reconciliation of Net Worth

• Interim Balance Sheet

• Interim Profit & Loss Statements

• Affiliate/Subsidiary financial statement