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%.
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.
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.
Three Schools of Thought for Selecting Term & Amortization
Advisors will typically view loan terms from three different perspectives. They want to pay the least amount of interest, or pay the least amount of monthly loan payment, or a combination of the two.
1. Least amount of interest paid
The school of thought for cost focused advisors. If you want the acquisition loan to cost you the least amount of total dollars then this is achieved by paying the least amount of interest dollars. The biggest impact on interest cost is not the rate but the amortization. Banks aren’t going to lower the interest rate by half but you can choose to cut your term in half. For a $1M loan at 6.5% rate on a 10 year term you would pay $362,575 in interest. But for a 7 year term the total interest would be $247,352 and for a 5 year term $173,968.
2. Least amount of monthly payment
The school of thought for cash flow focused advisors. If you want the acquisition loan to have the least amount of impact to your cash flow then this is achieved by having longer terms and/or amortization. For a $1M loan at 6.5% rate on a 5 year term the monthly payment is $19,566, for a 7 year term $14,849, for a 10 year term $11,354, and for a 10 year term with a 15 year amortization $8,711.
3. A cash flow and cost combination mindset
The school of thought held by most advisors who want the lowest monthly payment (especially in the first years after the acquisition) possible but also want to spend the least amount of total interest. This is achieved from getting a loan with a 10 to 15 year amortization schedule and then after the first year or two, or three, start knocking down the balance as quickly as you can through extra payments.
Most advisors approach acquisition loans with the combination mindset. The average lifespan of a ten year term loan for advisors is just under 6 years. SBA acquisition loans do not have pre-payment penalties. Many of the conventional lenders will allow up to 10% of the loan balance to be paid each year with no penalty. Some only have a prepayment penalty for the first 3 or 5 years. Even if you paid a 2% loan balance prepayment penalty on a chunk payment the interest savings far outweighs the penalty cost.