SBA Loans vs. Conventional Loans
When an SBA loan may be best option
If it’s the only option. More advisors qualify for SBA than conventional.
If you want to minimize or eliminate cash down payments. The SBA equity injection rule is the same as a 90% LTV vs. a 75% typical conventional LTV. If the seller does a 10% note on a two year standby then the buyer doesn’t have to make a cash payment.
If you want to minimize or eliminate seller financing. There are some conventional lenders who want something, even 10% seller financing as a matter of principal. But if the loan to value maximum isn’t close to being hit then it’s typically not required.
If you are trying to purchase a practice bigger than yours. Very generally speaking for the typical advisor, purchasing 1.5 times your size or less is probably conventional and purchasing 1.5 times or more was going to be SBA not taking into account any of the other million factors.
If you need to maximize lending dollar capacity: For advisory practices if you maxed out for a conventional acquisition loan at $1 million you would likely be at about $1.5 million if it was an SBA loan.
If you are unable to get enough life insurance: These are cash flow based loans and life insurance assignment is required for about every advisor acquisition loan regardless of SBA or conventional. But if you are unable to get life insurance in the amount of the loan to be assigned to the lender then usually you won’t be able to get a conventional bank loan. With SBA loans if an insurance carrier rejection letter or email from an agent sharing you’re not qualified and providing a succession plan will suffice.
For Next-gen Advisors:
In addition to the above, if you are trying to minimize the amount of out of pocket cash down payment while simultaneously require the minimum amount of seller financing possible then you’ll be wanting an SBA loan.
When conventional may be best option
When you easily qualify. Most advisors who surpass the conventional loan qualifying criteria will do a conventional loan.
If your fixated on lower and fixed rate. SBA and conventional loan rates were very close until the prime rate skyrocketed to 8.5%. SBA lenders will usually add a 1% to 3% spread on top of prime. But conventional lenders typically base their spread of the 10 year treasury or similar. While you can get a fixed rate SBA loan most SBA loans are at a variable rate while most all conventional loans are at a fixed rate.
If you you need a big loan and have a lot of property equity. For SBA loans over $500,000 if the borrower has 25% equity in property then the SBA requires the lender to put a junior lien on it up to the full loan amount. While you can take steps to bring your equity below 25% through HELOCs and refis, if you have several properties, it is a real pain and adds to the expense of the loan. All of this is simply avoided with a conventional loan.
If you have an earn-out provision. Conventional lenders have no problems at all with properly structured earn-outs in acquisition deals. Unfortunately the SBA does not allow for any kind of earn-out structure.
If you need more than $5 million: Most advisors won’t be seeking more than $5 million in acquisition debt which is SBA’s limit. Conventional lenders in the advisory niche are able to go to $10 million, some $20 million, and Live Oak Bank did a $70 million conventional loan where they used a few other banks to participate but they got it done.
For Next-gen Advisors: If your seller is willing to guaranty or for equity buy-ins if your seller and remaining partners willing to execute a corporate guaranty. These are thee two scenarios which make conventional loans possible for most all next-gen advisors.
