The Biggest Things That Surprise Advisors About Advisor Loans
As an active participant in the financial advisor industry, our team engages in conversations with advisors from across the spectrum. From RIAs to IBDs, and advisors from all walks of life, we receive thousands of questions about how advisors can secure capital and what loan options are best for them. Through those conversations our team has identified some of the most common things that surprise advisors about advisor loans
Surprises About Deal Structure
Many of the questions and surprises advisors experience center around deal structure. Although this is especially true for advisors who have never done an acquisition or equity purchase, “experienced” buyers have also learned that the type of lending used can significantly impact the structure of a deal. Each lender has different requirements and covenants. SBA loans in particular have more rigid limitations around deal structure (I.e. cash down, seller financing, loan to value, etc.) and seller involvement post-transaction. It’s important that advisors shop around and learn about the willingness of any given lender to accommodate a variety of deal structures before they enter into an agreement with a seller.
When it comes to acquisition loans in particular, many advisors don’t know about certain buyer protections they can bake into a deal in order to spread risk and ensure that the seller helps make the practice transition successful. Things like claw-backs or look-back provisions, non-compete covenants, and seller consulting agreements are common tools advisors can use to protect their interests during an acquisition.
Surprises About Loan Timelines
Advisors are often surprised by timelines. We’ve seen an equal number of advisors thinking the loan process can happen very quickly as well as those who believe it will take an exceedingly long time. Also, we find that most advisors believe they should negotiate a deal with the seller, then secure financing. In reality, it is best to speak to a lender first so you know what your purchasing capability is and so they can inform you of any covenants or requirements that can impact deal structure (as mentioned above). Also, it’s best if the actual loan process starts 60 – 120 days from the closing date, but deals can be closed more quickly if necessary. This surprises most advisors because they are familiar with the process of securing a mortgage, which usually takes 30-45 days. A business loan is likely to be one of the largest single debt sources in one’s lifetime and to complete a lender’s proper due diligence, it will take more time and require more information than a personal mortgage loan. Advisors need to give themselves and their lender of choice enough time to complete the process.
In some cases, a lender can accommodate shorter timelines, especially if you have an established relationship and have been working with a lender ahead of any deals coming to fruition. Lenders such as PPC LOAN, who cater to the financial services industry and have established criteria for vetting financial advisory practices, are best able to meet shorter timelines. This is because they have already established the process and criteria for evaluating and securing approval for all types of advisor loans. Traditional lenders who do not have experience in the space will almost certainly require more time and may place more restrictions on loan amounts and deal structure.
Surprises About Loan Amounts
Prior to bank financing being an option, most deals were done largely with personal cash and/or seller financing. Today, advisors can secure loans for as much as 100% of the total purchase price. Advisors can get pre-approved for specific loan amounts to help to determine what they can qualify for before they engage with a seller. This lets a buyer go into negotiations confident with their purchasing ability and a clear sense of how to structure the deal. Any gaps in financing can be filled with a seller promissory note, which is dependent on the seller’s willingness to serve as financier, or a down payment from the buyer.
Surprises About Collateral
Many advisors assume that they will need to provide personal collateral in order to secure a loan. Only SBA loans require tangible assets for collateral such as real estate when available. Most conventional lenders, such as PPC LOAN, do not require a lien on personal assets or real estate to serve as collateral for a business loan. Instead, they place a lien on the practice to secure the loan and require a personal guarantee. For equity purchases, existing owners can build in protections in the event of a loan default to satisfy the lien and preserve their interest in the practice. In any case, it’s important to know that a lien will not be filed on personal assets for a business loan when dealing with lenders like PPC LOAN.
Surprises About PPC LOAN Specifically
As a specialty lender, PPC LOAN operates differently than a traditional bank. While we aren’t a bank, we also don’t operate like the traditional loan broker who will hand you off to a bank who may or may not be committed to supporting your ongoing capital needs. PPC works with our customers from the first phone call until the loan is paid in full. We manage the relationship throughout its life and will assist with any additional needs when they arise through our Underwriting, Closing, and Loan Operations teams internally. We are active in the industry and work closely with advisors to develop creative solutions to meet the financing needs of each specific deal.
Whether you’re seeking a loan for an acquisition, equity purchase, or to refinance existing debt, it’s important to educate yourself on your loan options ahead of time. Many lenders can provide term sheets for each of their loan products as well as sample deals for you to review. PPC LOAN also offers free consultations and is happy to discuss prospective deals as well as guide an advisor without a specific need, but who is looking to learn more about capital solutions to help grow his or her practice.