3 Reasons to Refinance Your Acquisition Loan Now
Financial advisory firms looking to grow may find themselves cash strapped after an acquisition, especially if they utilized a high interest loan or a short-term seller note to finance the deal. While the primary purpose of refinancing is typically to secure a lower interest, there are a number of other reasons to consider refinancing.
Consolidate Debt to Free Up Cash-Flow
If you have shorter term debt with another lender or from seller financing, refinancing is an excellent way to consolidate debt and free up cash flow.Often, advisors can extend the loan term to reduce the monthly payment and free-up cashflow to build liquidity, reinvest in the business, or cut ties with the seller. One thing we commonly see is the buyer’s desire to completely cut ties with the seller after the transition and look-back period when the seller is not committed to actively working in the business for an extended period of time.
Advisors who are indebted to the seller often find that the seller continues to “look over your shoulder” or want to know more about the ongoing business operations/financials until they are paid in full. Refinancing the seller’s note allows you to pay off the note in full and formally end the relationship. It’s important to note that seller financing can still be a valuable part of a deal structure, but long term it may be better to cut ties completely.
Advisors who used broker-dealer financing may also want to refinance in order to eliminate repayment terms tied to production and other restrictions. Often, broker-dealer loans setrepayment terms based on a percentage of an advisor’s gross production. As the firm grows and generates more revenue, theproduction-based repayment terms will result in larger amounts being directed towards the loan payments instead of other growth initiatives. By taking the loan to a third party, the advisor can take back control over their cash flow and secure more flexibleterms.
Untie Your Personal Assets FromYour Business Assets
If you have an SBA loan that required a collateral lien against your primary residence and/or rental properties,refinancing with a conventional lender will allow you to remove the lien from your home. This allows you to avoid a number of potential pitfalls, which could include:
- Losing Proceeds From The Sale of Your Home:If you need to sell your home and have an SBA lien from a business loan, it may be required that the proceeds from the sale of your home be used to pay down the principal balance on the SBA loan. In most cases, advisors want to take the proceeds from the sale of the home and apply them to the purchase of a new home.
- Loss of Access to Equity:If you do have a lien on your home, this will block your access to the equity you have established. It will likely prevent you from being able to secure a home equity loan or home equity line of credit until the SBA lien is removed.
Refinancing your SBA loan eliminates the lien(s) on your residence and/or investment properties and separates your business and personal assets. This gives you the freedom and flexibility for any future decisions involving the need to leverage equity or potentially sell the property(s).
Secure ALower OrFixed Interest Rate
Securing a better interest rate isoften a key driver in refinancing. A lower interest rate will reduce interest costs and will also lower your payments (assuming no change in loan term). Lowering your monthly liabilities improves cash flow, giving you access to funds that you can use to invest in marketing, hiring staff, and other growth initiatives. If moving from a variable to a fixed interest rate, it also helps you stabilize your expenses and better predict cash flow over time.
Overall, refinancing an SBA, seller note, or even a broker dealer loan can help you improve your cash position and take back control over your business and your personal assets. It’s always important to shop around before securing a refinance loan to make sure you are getting the best deal possible.