Why is it that an advisor can be rejected by one SBA lender but approved by another? 

Perhaps the biggest misperception about SBA lending is that all SBA lenders are essentially the same. While the SBA rules are the same for all, the SBA lenders providing the loans, can widely vary from each other. 

Each SBA lender has their own set of additional qualifying criteria, policies, and requirements that is stacked on top of the SBA rules and requirements. The SBA also defers many of their requirements to the lender’s standard policies, which widely differ lender to lender. 

In wealth management M&A, the majority of SBA lender loan rejections that come to us, are triggered from a bank’s internal policies and preferences and not due to non-compliance with the requirements stipulated in the SBA’s SOP (Standard Operating Procedures). This can leave an advisor in the frustrating position of being qualified for an SBA loan, but just not qualified for an SBA loan with the specific bank that declined it. 

We call this the “SBA approval differential dilemma”. It is the dilemma where a borrower can be declined for an SBA loan with one lender but approved by another. 

What are the key factors in which SBA lender approvals differ from each other? 

While the SBA rules are the same for all, the SBA lenders that provide the loans widely vary from each other. Besides the fundamental differences in experience, expertise, and focus on advisor lending, different SBA lenders also have different and varying qualifying criteria, preferences, and priorities. Some of the differences are finite like credit score minimums, and others are more nuanced, considered on a case-by-case basis. 

AdvisorLoans has worked with a lot of SBA lenders over the years and have done due diligence on many more. We think the case can be made that there are as many differences between SBA lenders as there are with different independent broker dealers. Even SBA lenders who are focusing on wealth management M&A and familiar with advisor acquisitions, can greatly vary from each other in the kinds of loans, qualifications, and structures they allow.

Common ways SBA lenders differ that can impact an advisor’s loan approval: 

Cash Flow 

The SBA requires a minimum DSCR (Debt Service Coverage Ratio) of 1.15. DSCR is determined by dividing your NOI (Net Operating Income) by your total debt service. Most SBA lenders require a DSCR higher than what the SBA allows. Typically, SBA lenders will have a minimum DSCR requirement anywhere from 1.25 to as high as 1.75. AdvisorLoans can get deals approved at the SBA’s 1.15 DSCR minimum. This means that a borrower can qualify for a loan through AdvisorLoans that is 50% more than the loan amount a SBA lender with a 1.75 DSCR minimum can do. 

Credit Score 

For loans over $350,000, the SBA does not have credit score requirements other than deferring to the SBA lenders internal credit score policies. SBA lenders minimum credit score required typically ranges from 625 to 680. AdvisorLoans can get > $350K loans approved with a credit score as low as 625. 

Bankruptcy 

While the SBA allows for loans to borrowers who have a previous bankruptcy, many SBA lenders do not. Some SBA lenders will consider a prior BK depending on how long ago and the circumstances that caused it. Others will reject a borrower that had a BK 25 years ago. AdvisorLoans can typically work around a prior BK and we’ve closed more than a handful of loans for advisors in this predicament. 

Loan Amount 

While the SBA doesn’t have a minimum loan amount, many SBA lenders in the wealth management space does. If an advisor called around to the different lenders who are focusing on our industry, they’ll find about every lender has at least a $250,000 minimum loan amount requirement. While we understand that there isn’t much of a financial incentive for lenders to take on small loans, there is a need for it. AdvisorLoans minimum loan amount is $100,000. 

Advisor’s Experience 

The SBA does not define minimum years of experience required and also allows for an advisor who is currently an employee to qualify for a SBA loan (with an equity injection). Many SBA lenders however are uncomfortable with “startup” loans for an acquisition. AdvisorLoans frequently closes SBA loans for employee advisors who are acquiring all or part of another advisor’s business.

Out-of-State or Relocation 

The SBA does not require that an acquisition must be made in the same state the borrower resides and does not prohibit a borrower from moving to the state where they are acquiring a business. Some SBA lenders however don’t like out-of-state acquisition deals or those where the borrower is relocating. AdvisorLoans has yet to have a deal rejected based on these scenarios. 

Collateral 

The SBA has specific rules for when available collateral must be taken when the loan is over $350K. However, the SBA allows for loans where the borrower does not have a house or property available for collateral. Some SBA lenders will not approve larger size loans if there is no collateral being applied. AdvisorLoans has yet to have a >$350K loan rejected because the borrower did not have available collateral. 

The Human Element

Even when a loan passes all of the minimum SBA and the bank’s internal policies and requirements, in the end, it’s humans that make the final approval decision. The human element and its impact on how different lenders view different loans is more significant than one might think. Each approver and/or committee member has different backgrounds, loan experiences (good and bad), preferences, and priorities. These vary from each other within the same bank, and differ all the more from humans at different banks.

Equity Injection Requirement

The SBA requires a 10% equity injection for all complete acquisition loans. The SBA allows for the equity to be cash, “assets other than cash” and standby seller financing.  For advisor buyers who have practices that can be valued for an amount high enough, the practice can be used to meet the “assets other than cash” requirement, resulting in no cash down payment being made. Some SBA lenders are comfortable with utilizing the “assets other than cash” for advisors and some are not. SBA lenders who are not experienced in acquisition lending or not experts in the wealth management industry may only allow for 10% in a cash down payment.

Bank Policies

Each SBA lender has their own set of policies that govern their loan approval criteria and requirements. These policies are stacked on top of what the SBA itself requires. While the SBA’s rules and policies are substantial, the SBA defers many criteria requirements to the lender to follow their normal conventional lending policy. 

Lender’s Legal Counsel

SBA lenders often utilize lawyers who are SBA “experts” in advising the lender of SOP policy and intent when eligibility or structure grey areas come up in a loan. These lawyers also vary in their opinions and views on items not explicitly spelled out in the SOP and corresponding SBA issued guidance. This leads to different lenders who are using different lawyers, approving different loan scenarios. While lawyers can sometimes differ in their advice on the same issue, all will have a conservative and cautious perspective that is focused on protecting the lender. 

Expertise in Wealth Management Industry

The differences in SBA lender’s expertise in lending to advisors in the wealth management industry, and especially for acquisition loans, varies greatly. The more experience a SBA lender has in any industry the more comfortable they become and the more expertise they build in understanding its nuances. There are not many SBA lenders that we would consider as having substantial expertise in the advisory lending niche. Over the last two years combined (2020-2021) 105 lenders approved 432 SBA 7(a) loans to Wealth Advisors. AdvisorLoans originated 38% of these loans, Live Oak Bank originated 34% and 103 lenders combined for 28%.

AdvisorLoans Helps Advisors Avoid Being Rejected in the First Place 

AdvisorLoans is a leader in SBA lending to the wealth management industry. We know what the SBA lenders in our space require and which lender is typically going to approve which type of loan and borrower. AdvisorLoans does enough SBA lending volume with our SBA partners that we are able to get lenders to defer to the SBA minimum requirements when needed. Because we are focused on helping as many advisors as possible with their lending needs, we have purposefully partnered with SBA lenders who have a wider approval criteria. 

Once we have a understanding of the advisor’s situation and scenario, we select the right SBA lender based on 3 key factors: 

1. Expertise - Expertise and experience providing SBA loans to the wealth management niche. 

2. Focus - Currently focused and motivated to lend to advisors like you, for the loan purpose you are seeking, for the loan amount you need. Those who want your loan. 

3. Criteria - Has policies and requirements for qualifying (credit score, cash flow, start-ups, collateral, type, previous bankruptcy or judgments, etc.) that matches your criteria situation. 

Because AdvisorLoans manages the loan process all the way through to funding, we advocate for the advisor in each step of the loan process to ensure the highest probability of loan approval and funding.