Rates, Terms, & Covenants:

What are the rates and terms of a SBA 7(a) loan?

Most SBA lenders in the advisor lending space will offer 10 year terms with a variable rate between 2% and 3% over the Wall Street Prime Rate.

What are the rates and terms for conventional loans?

Most conventional loans have a 10 year term and rates we are currently seeing are between 300 and 450 basis points over the 10 year treasury rate.

What does the WSJ Prime Rate have to do with my SBA loan rate?

Most all SBA lenders use the Wall Street Journal Prime Rate as the base rate they add their interest rate spread. SBA lenders will usually price their loans at 2% to 3% over the WSP rate. For variable loans, the interest rate of the loan will go up or down in conjunction with the WSP rate.

How does the current WSJ Prime Rate compare to years past?

The current (Q3 2024) WSJ Prime Rate is 8%. For context, the WSP Rate was 5.5% in December 2018 and 4.75% in December 2019.

What factors impact how low of a rate I can get?

Lenders will adjust their preferred rate up or down (within their range) primarily based on strong cash flow, borrower’s net worth, loan size, and any prior loans or experience with the borrower. Usually, the lenders with the widest qualifying criteria aren’t the lowest rate lenders and the lenders with very high and narrow criteria standards offer slightly lower rates.

How important is rate compared to other factors?

There isn't typically a night and day difference in rate between the lenders focused on the wealth management industry. The factors that a borrower may consider more important than rate are the lender’s qualifying criteria for both the borrower, the loan’s cash flow and the acquisition deal structure. Other factors include the lender’s expertise and experience in wealth management M&A, how dialed in the lender is with process and support, if there will be collateral requirements, what the lender’s long term commitment is to the advisor lending space, the willingness to approve and fund multiple acquisitions, the cash down payment and seller financing requirements and flexibility, and the lender’s ongoing required covenants imposed on the borrower.

How are rates expected to change over the next few years?

They are expected to go higher!

What does it mean when a loan is fully amortized?

When a loan is fully amortized the entire balance will be paid off at maturity (aka no balloon payment) and all the loan payments are the same amount.

What are the typical ongoing covenants for a SBA loan?

Most SBA loan covenants are minor, not transferring assets without lender consent, maintaining insurance, submitting annual tax returns and personal financial statements. The borrower is usually not allowed to transfer company ownership or further lien their business assets. SBA loans will typically have far fewer ongoing covenant rules than conventional loans.

What are the typical ongoing covenants for a conventional loan?

Conventional lenders vary in their ongoing covenants. Most will include covenants to not transfer assets without lender consent, maintaining insurance, submitting annual tax returns and personal financial statements. The borrower is usually not allowed to take on other debts without the lender consent, transfer company ownership, or further lien their business assets. However, some conventional lenders also require full P&Ls to be submitted multiple times throughout the year, maintain minimum levels of revenue, and even require maintaining a minimum DSCR throughout the term of the loan.​