Podcast: The Benefits of Conventional Loans vs SBA Loans for RIAs and Financial Advisors

Mike:

Welcome to the Advisor Financing Forum, a weekly podcast presented by SkyView Partners. My name is Mike Langford and this week Scott Wetzel the CEO of SkyView returns for an expansive exploration of the benefits of conventional commercial loans versus SBA loans for RIAs and independent financial advisory businesses.

Mike:

One of the things I love most about these conversations with Scott is how he walks us through the variety of use cases for financing from the human perspective, if you will. Yes, this is business financing we're talking about, but Scott and the team at SkyView understand the unique nature of our space. Financial advisory firms are very personal and extremely relationship-driven.

Mike:

And as such, owners of wealth management firms are very emotionally invested in that business and in their clients. Understanding that and sharing the options that financing can provide is one of the things that really comes through when you listen to Scott. If you have a question or a suggestion for Scott or the SkyView team as it relates to this episode of the show or if you have something you'd like to see us cover on a future episode, feel free to reach out to podcasts@skyview.com or ping us on your favorite social media platform.

Mike:

Also, please do like and subscribe to the podcast on Apple Podcasts, Spotify, Stitcher, or wherever you'd like to get your podcasts. We've got some really great shows coming in the next few weeks and you aren't going to want to miss any of them. Okay. Without further ado, let's get to it with Scott Wetzel.

Mike:

Well, Hey Scott, welcome back to the show. Great to have you.

Scott Wetzel:

I appreciate being back on the show.

Mike:

Yeah, it's wonderful. So one are the things we're going to be talking about in more detail today is something we touched upon on an earlier episode, and it is the benefits of conventional loan financing versus SBA .and what options are available for RIAs and individual financial advisors. So why don't we start at the high level, what is a conventional non-SBA loan and how does it generally compare to an SBA loan? Who would typically be applying for these things?

Scott Wetzel:

Yeah. Mike as you were saying that I thought, "Just what a riveting topic," right? I mean, could be more exciting? I don't know if there's a way to make this exciting, so let's make it succinct. Let's do that, right?

Mike:

That sounds fun. Yeah.

Scott Wetzel:

I think a good start is to start off with what a Small Business Administration loan is as it compares to conventional and the nuances of both programs. Because each serve a different set of borrowers or applicants. And the SBA loans are an extremely important mechanism for funding certain transactions and certain businesses. And then for other applicants and borrowers who qualify for conventional financing, the conventional financing is a more appropriate vehicle.

Scott Wetzel:

And as you're aware, SkyView focuses on and funds primarily conventional obligations. I believe it's around 94% to date, but we do have the ability to pivot and move to an SBA loan. And I guess we can go into the nuances of each as directed by you.

Mike:

Sure. Starting out with the SBA loans as you teed it up. Traditionally, why have RIAs and individual advisors maybe sought those loans out historically?

Scott Wetzel:

If you look at any vertical or industry especially that's considered cashflow lending and I'll explain that more, which the RIA community has certainly considered. Which is any industry that lacks a significant amount of tangible assets. Unfortunately, our borrowers don't have tractors and/or silos if I could just get them to buy either or both that we would have a much easier time getting them to banks to finance them because banks like to have something that's tangible that they can take back in the event that things don't work out.

Scott Wetzel:

Where with cashflow lending obviously is just collateralized by the business and the future cashflow. And as banks come into each new cashflow lending vertical, what the market has witnessed in dental, veterinary and any other industry, banks will come in with a comfort level with SBA first. And the industry owes a huge debt of gratitude to Live Oak Bank for 2013, started a SBA program for RIAs and really was the first bank in the country to do so.

Scott Wetzel:

And the reason why banks want that SBA, it's a guarantee for 75% of the loan amount. It's a little more certainty that they will be repaid and the US government for those types of borrowers for nascent lending verticals, that is the way things start out, now as that portfolio of SBA loans seasons, banks and we've been able to get quite a few banks comfortable with funding conventional and not with that guarantee that the SBA provides.

Scott Wetzel:

And there's a lot of nuances and reasons why the rates, terms and conditions for conventional oftentimes are much more appealing than the rates, terms and conditions of an SBA loan for our borrowers. And that's why we fund via the conventional structure.

Mike:

And as you mentioned on an earlier podcast, this is a relatively new phenomenon for RIAs and advisors, right? That there previously hadn't had access to conventional loans, primarily because as you just said. Lenders weren't willing to make them because there were uncollateralized loans. They didn't understand the business. They tended to shy away with conventional loans on cashflow businesses. But now you've built a network of banks who are funding these loans, correct?

Scott Wetzel:

Correct. And it really comes down to some really key differences between the two and can make it more appealing. And I'd say that first and foremost and again, a ton of respect and a ton of appreciation for the SBA program for certain borrowers. But for borrowers who qualify for conventional, it provides a lot more flexibility. As an example, with an SBA loan, the seller of the practice needs to depart that firm within one year, no questions asked.

Scott Wetzel:

They cannot stay on as an intern, as a counselor, as a receptionist. And we found in the RIA community, oftentimes that's not of interest or sellers that 68% of our transactions involve a seller that is selling a portion of the business and retaining some role and ownership in the business. And will retire slowly over time, because let's be honest, being an RIA with a great practice and running that is his great job. And most of our retirees like to retire over a course of years, not within 12 months.

Mike:

And that's a great way to start from it, right? So from the applicability or the desirability for the type of business that's taking the loan and what they intend to use the proceeds for and how they plan on moving forward. Let's get into some of the kind of the details of the loan structure. In terms of, as an example, rates, your fixed rate versus variable rate or whatever, in terms of loan terms. Let's walk down some of those. So with a conventional loan it's fixed rate, correct?

Scott Wetzel:

With both, it really depends on the bank. With the SkyView platform, we have funded every conventional obligation loan at a fixed competitive rate. Whereas a significant majority of SBA loans are funded at a floating rate of X percent over prime, which can be kind of appealing in today's marketplace, candidly, but we're finding the fixed rate and the floating rates offer between conventional SBA to be fairly commensurate in today's market. And a lot of people wanting to clearly lock in at where we're at today.

Mike:

Yeah. I can see that, especially it's hey, the rates are incredibly low. I also just think of it from a business planning perspective, right? Having no knowledge of what my loan payment is going to be and not ever being surprised with it going up. So it's beneficial. How about kind of the stuff that I think a lot of business owners worry about? You mentioned there's no collateral involved generally when you're lending an advisor at an RIA firm. But oftentimes when it's a non-collateralized debt obligation in a business, the business owners have to take some sort of personal lien, right? Or have something. How do the loans tend to differ there?

Scott Wetzel:

Well, they differ quite significantly. And I know that each one of our applicants and borrowers plan that nothing will ever go wrong, but the reality is things can go wrong, right? Health, wealth, whether otherwise. If things don't work out, the risk profile for an SBA defaulting borrower is substantially higher.

Scott Wetzel:

The reason for it is with each SBA loan, it requires that the borrower or guarantor place a lien on their primary residence. Where with our conventional program, we require no liens on personal residence. But with each program, there is a personal guarantee. So essentially an unsecure collateralization from both borrowers. And here's how it works differently to kind of sum it up. In the event of default and loss I'm assuming in both cases, the borrower would be filing for bankruptcy.

Scott Wetzel:

At what point, if you have a conventional obligation, the obligation is discharged and you're still sleeping in your home at night, as well as your family. With an SBA obligation, there's a lien on your home. So that bankruptcy and that lien is not discharged from your home. So not only are you losing your business, you're also losing your home in the event of default with an SB obligation.

Mike:

And that's the old phrase from Independence Day. Scariest environment imaginable, right? If you are losing your business for whatever reason, things go south, and then you're also losing your home that's really, really scary. So we talk about that a lot in terms of business structures, right? Making sure that you protect your personal assets by having the right structure, whether it's an LLC or S Corp. You want to make sure you protect your personal assets as well so that you don't get completely wiped out. As you mentioned, nobody ever expects a loan to go south, but things happen in life and in business.

Scott Wetzel:

Well, it's stressful enough to go through loss of a business. I can't imagine the stress of having to deal with losing your home with your spouse. I certainly wouldn't want to go through that process.

Mike:

Exactly, exactly. So let's get a little bit lighter there. Because again, we don't anticipate that ever happening [inaudible 00:11:59] when people are thinking about borrowing money and especially if they're borrowing money to facilitate the growth of their business or the transition of their business. Let's talk about the process for qualifying and securing the loan. Is there a difference between conventional loans and SBA loans from just a, I don't know, logistical perspective of getting the deal done?

Scott Wetzel:

They are substantially different. And I will tell you to the extent that someone approaches SkyView and says that they want to pursue an SBA instead of a conventional, we will refer them elsewhere. Because I think I would need to put my entire credit team on antidepressants if we wanted to process SBAs every day. It is a government program. So it is offered by banks, but they need to meet very rigid government documentation, procedural guidelines that on average, an SBA loan takes about 150 documents from the applicant.

Scott Wetzel:

Where we're looking at 27 to 35, depending on the nature of the transaction, which clearly the number of documents can extrapolate to time. Takes an enormous amount of time to get an SBA loan funded and varies with each bank that you're with as compared to conventional. Or in one case, we closed an obligation from picking up the phone at SkyView to closing the acquisition in 23 days. That would be absolutely impossible with the SBA program.

Scott Wetzel:

We actually did close an SBA loan for a borrower in early 2019. And we had to collect 503 documents from the applicant to get it done. I think my credit underwriter on that almost resigned after he [inaudible 00:13:47] We promised him no more SBA. So it's a burdensome process for everyone that we certainly want to avoid. We want to get our applicants into a conventional structured loan with a fixed rate that they know. As you point out, you can plan, you know exactly what your payments are going to be for the next seven or 10 years. And also you don't have as much stress about the downside if things don't work out.

Mike:

I love when I recognize a new phrase that helps me appreciate a concept a little better than I did before. Both Scott Wetzel and Katie Bruner, who was on the show last week talking about the new practice acquisition roadmap for financial advisory businesses. By the way, you should check that out. First of all, listen to the podcast on Apple Podcasts, Spotify, Stitcher, yada, yada, and head over to skyview.com. Check out in media there, you'll find that roadmap document available for you there.

Mike:

But both Katie and Scott use the phrase glide path as a way to describe an advisor or an ownership teams' planned exit from the business. And I had never thought of it that way. So often we think of business acquisitions or retirements as this event that is date certain. But in today's world with a business that is not demanding of physical labor, there's no real reason why transitions can't be smooth glide paths towards an eventual exit. In many cases, it's better for the business, it's better for the clients and better for the psyche of the advisor or the owner.

Mike:

If you're thinking of starting your own glide path, swing by skyview.com and click on the get preapproved button on the top right hand corner or call 866-567-6282 or email info@skyview.com and someone will get right back to you to help you get the process rolling.

Mike:

What are some other things that people should be aware of or borrowers should be aware of as they consider a loan period, but consider conventional financing? So as an example, what are the expectations for how much they can borrow as it relates to their cashflow?

Scott Wetzel:

Wow, that's a great question. And with conventional, the amount that they can borrow is limited to their balance sheet. But also too, each bank has a legal lending limit to each borrower, and then they also have a house limit. So each time we have a new applicant come to SkyView, we work with them to determine what their M&A aspirations are. If they're only planning on buying one practice for a million dollars, they might fit with one of our billion dollar banks and it might be a great relationship.

Scott Wetzel:

If their aspirations are to grow to 20, 30, 50 million, that's a different thing. It's going to require a bank and I'd say the eight to 10 billion plus range. But with the SBA program, regardless of how big the bank is, that you're limited to $5 million. As you think, the SBA program is for borrowers that don't qualify for conventional. So certainly anyone taking out more than five for an M&A probably isn't really the right applicant and borrower for the SBA program.

Mike:

Well, and that S stands for small. It's meant to be small, right?

Scott Wetzel:

Correct. But in fairness, I thought I should point out some positives of the SBA over conventional because clearly they are. One of the key differentiators is the prepayment penalty. SBA financing is oftentimes utilized as kind of seed or mezz financing to get started. And then is oftentimes refinanced out to conventional and the SBA program recognizes that and allows it, and therefore there is no prepayment penalty to leave.

Scott Wetzel:

And oftentimes, SBA loans are sold by banks almost immediately in the secondary marketplace. So really the bank has recouped and covered its cost pretty quickly. Conventional loans and every loan that we have funded has a prepayment penalty that is structured kind of like a CDSC on a mutual fund that's 4% in the first year, three, two, one over that four-year period. Because the bank wants you to go to term and they want you to make all your principal and interest payments over time, over the term of the loan.

Scott Wetzel:

However, in each case, our borrowers are allowed to pay up to an additional 20% of the principal amount off. And we've rarely found borrowers that just want to repay their loan within the first year, because why are they taking out a loan in the first place, right? So it has been amenable to our clients, but wanted to point that one out, because that is a huge benefit of the SBA. If you plan on paying it off in a year, you don't want to go the conventional structure.

Mike:

And that makes sense and if for some reason you do have the ability to pay off your conventional loan early, well, that's just a good problem to have. I would have imagine.

Scott Wetzel:

It certainly sounds like a good problem to have, right? And oftentimes we do a lot of refinance work of SBA loans. I think we've done north of 70 million since inception, that borrowers had started off with an SBA and there was no conventional financing available. Learn more about conventional. So you can refinance out of SBA and without having any prepayment penalty and get to a fixed rate, and also release the lien from your home.

Mike:

Are there any other things that you think are really important for a firm or an advisor to keep in mind as they approach the process for securing a conventional loan here as they want to grow their business, or they're thinking about making some changes in the business?

Scott Wetzel:

I think I should point out one more positive on SBA first and that's that SBA loans, you can get up to a tenure term and tenure amortization schedule in each case. Whereas our conventional program is structured as a seven-year term with a 10-year amortization schedule. So you get the benefit with the conventional of paying a lower loan amount as if you're paying over 10 with a conventional. Yet you do have a residual balance left at the end of seven years, which if you have been a well-behaved borrower that banks are very interested in refinancing the remaining residual for that additional three years.

Scott Wetzel:

And also at a favorable rate because presumptively you've been paying on time and have been a great client. And oftentimes, we recommend to our advisors that have more than sufficient cashflow to actually pay it off if it's only on a seven-year amortization schedule. But for some people that want tenure term and tenure am that's only available currently. But I can say in limited cases, we're able to do a tenure term and tenure am, but it's available every time in the SBA program.

Mike:

That makes sense, makes sense a lot. Well, this has been very helpful. I'm sure some people are really kind of taking this consideration to heart. What's the process for somebody to explore financing through SkyView?

Scott Wetzel:

We've done a lot of education around, even if you don't have an acquisition this week, next month, this year, it's still a great time today to initiate a relationship with a bank that actually funds M&A transactions with the RIA industry because there are very few throughout the country. And we have a banking consulting team that we have advisors come to us every day and say, "Hey, I'm based in Buckhead outside of Atlanta. I'd like to work with a bank and here's my plans. Here's what we're looking to do. Here's what my business looks like."

Scott Wetzel:

And we'll help them start a relationship today with the banker. And they'll oftentimes open up operating accounts, other accounts, maybe do a mortgage business with the bank. Because banks certainly don't like being treated like an ATM. Where there's just an old philosophy in banking that's not applicable here, but old habits just die hard is why is this borrower coming to me and not utilizing their current bank?

Scott Wetzel:

Well, we all know that Bank of America and Wells are not in the business of funding RIA loans and 80 plus percent of RIA practices are with one of the big banks. So we recommend to start a relationship, place your operating account with that bank, you'll get much better service, love and attention. I actually had somebody's cell phone number to call and then email. And people will pick up the phone when you need service.

Scott Wetzel:

And we've found it to be a very harmonious relationship between our borrowers as being depositors. Then you also got to realize from the bank standpoint, their biggest concern is always fraught, that this entity really doesn't exist. And if you have an operating account and they're seeing transactions over the course of months or years, they certainly can see that you exist. So when you go to extend your hand for financing, it's very likely that you'll receive more favorable treatment if you're a current bank customer.

Mike:

You have had you and I have had many conversations over the last six months or so about this general topic, but that is perhaps my favorite piece of advice that you routinely give is develop a relationship with the banks, right? Set up an account, start doing business there. And you liken it to any other business. The more comfortable you are with people you do business with, the more likely you are to give them favorable terms, to give them better service, to put them to the front of the line to get them moving a little quicker. And that should be something that advisors really understand, right?

Mike:

I mean, we're in a relationship-based business, right? The more business an individual client has with you, the more white glove treatment you're going to give them, the quicker you're going to return their phone call and so forth. So I think the same type of stuff is at work here. And to me, if I'm an advisor in today's environment, that's one of my first steps, right? I know that at some point in time, I'm going to need to access capital, whether it's to acquire another business, whether it's going to be facilitating a partial sale, as you mentioned, or expanding the business in some other way. Why not develop that relationship right now? So I love that advice.

Scott Wetzel:

When we started the firm, we were concerned that bankers and brokers, this is going to be awkward, right? And our experience has been quite the opposite that advisors that are extending personalized, customized, excellent service to their clients every day. And it's no wonder they're frustrated when they can have considerable balances at Bank of America. And they're calling a 1-800 number and get no service. And then when they're connected to one of our community banks and they start working with them, I cannot tell you how many calls I've had since inception with saying, "Hey, really appreciate you doing the financing, but we really love working with this bank in North Dakota."

Scott Wetzel:

And these are the people their practice is based in California. I don't ever want to go to the bank and have to go in the lobby or the drive-thru ever again if I don't have to. And with a great community bank, you have someone you can call, you have great technology, you can do it all from your desktop. And you get ahold of somebody and get that same level of service the RIA is extending to their clients every day.

Mike:

Yeah, that's so true. It's so true. I mean, we do like 99.9% of all of our banking online now. And frankly, many of the advisors clients' likely do most of their interaction either on the phone or digitally as well with the occasional face-to-face meeting. But it really does make sense. And to cast that net a little wider and have a better service relationship is so, so beneficial.

Scott Wetzel:

We've certainly found to be a great match for our clients, depositors and borrowers.

Mike:

Well, Scott, this has been fantastic. Thank you very much for taking us through this. I know I really learned a lot. I appreciate it.

Scott Wetzel:

I always appreciate your time. So thanks for having me on.

Mike:

Thank you for joining Scott and me once again. I hope you learned a lot. I know I certainly did. You know, it's funny. I have a bachelor's degree in finance and an MBA, so I've had to study debt financing, right? But I must admit since I've spent most of my professional life in the wealth management and investing side of things, I was a little rusty when I got started working with the SkyView team. I think that's likely true of many of the folks listening to the podcast if you're financial advisor, or you're the owner of a wealth management firm. You haven't had to spend much time thinking about conventional commercial loans and how they differ from SBA financing and what are your options and what's the process look like? That's okay.

Mike:

That's why we're doing this show. And that's why we have the great folks like the team at SkyView to help guide us for all of these options. If you'd like to explore financing in more detail, or just learn more about it, zip on over to skyview.com or give them a ring at 866-567-6282 or email info@skyview.com.

Mike:

As Scott says, "It's never too early to start building relationships and getting the process moving." Okay. Until next time, please stay safe, wear your mask and be nice to each other. Okay? See you. Bye.