Where’s the liquidity? Historic financing options for IBDs and RIAs

Today, 68% of advisors cite securing M&A financing as crucial to their growth; however, only 17% of advisory practice acquisitions receive bank financing. Historically, banks have been reluctant to lend to financial advisors due to zero or negative net tangible collateral valuations and unpredictable cash flows generated by the transactional revenue model. However, as the transactional nature of wealth management practices has evolved into more predictable fee-based revenue, select banks are becoming more comfortable with advisory loans.

Currently, there are over a trillion in advisory fee accounts, and the number is growing at over 20% year over year. As a result, advisory practice lending firms have emerged. One bank—Live Oak—dominates the nascent advisory lending market.

Live Oak is the leading advisory lender in the U.S. and has the lowest default rate of any FDIC bank in the nation. Since 2013, Live Oak has closed over $500 million in advisory loans, primarily RIAs, with zero charge-offs to date. Live Oak has utilized the SBA structure for a substantial percentage of its advisory loan portfolio.

The financing options available to IBDs and RIAs are evolving rapidly. Today, SkyView Partners offers SBA and conventional financing through our network of banks. Our conventional lenders offer attractive, fixed-rate options over seven—to ten-year terms.

So, what are the key differences between SBA and conventional commercial loans, and how does an advisor begin to choose?

Banks started with and appreciate SBA loans to financial advisors because the program guarantees 75%—90% of the loan's value. The bank can make a loan, and in the event of default, it is reimbursed with little risk involved. In addition, the banks can often package and sell the loans. This creates non-interest income and a diversity of revenue for the bank while allowing the bank to stay within its industry concentration limits.

SBA loans have been a tremendous benefit to financial advisors. Banks have not been able to assess risk for cash flow-based loans without a significant amount of collateral. It is hard to justify the lending risks if they can't see and take it back. Detractors of SBA loans point to the high origination fees, cumbersome paperwork, and the extended time it takes to navigate the loan approval process. The gateway SBA loans have provided historical evidence of mature deals and zero charge-offs. This credit history allows banks to explore conventional commercial loans to an industry they have largely ignored.

As conventional commercial loans are written, wealth management and financial advisory practices will become a burgeoning market for banks. Currently, most banks do not understand financial advisory businesses. They will gladly accept a loan application and then promptly sit on it for six months as they assess how to price the risk. Like any loan application, a conventional commercial loan is still a time-intensive and cumbersome process of completing paperwork, gathering practice data, answering basic industry questions, collecting more practice data, and finally supplying that same data multiple times as the application navigates its way through the credit approval process.

However, a conventional commercial loan can be worth the work for many advisors who choose to undertake it, as total fees are generally lower. Commercial loans also have different restrictions for business owners, which can allow an advisor to purchase an entire business rather than just an asset sale. Partnerships and partial sales also become a possibility. With the industry's maturity in terms of teams and ensemble practices, the ability to apply for a loan under a business name and have several partners share responsibility for the loan is tremendous. Funding limits can also be higher with a conventional commercial loan, meaning a buyer can provide the seller 75% to 100% of the practice purchase price. More extensive funding options have broader implications for motivating a sale and cash-flowing an acquisition, which will begin to impact valuations.

Choosing the right type of loan is a critical decision that can significantly influence the success of a practice acquisition. For advisors ready to explore their financing options, SkyView Partners is here to guide you through the process with expert advice and tailored financial solutions. Start your journey towards successful practice acquisition by getting pre-approved for financing with SkyView Partners today. Visit our website or contact one of our financing specialists to discuss how we can support your growth and strategic goals.

Remember, the right financing can not only facilitate your immediate acquisition needs but also enhance your long-term business valuations and succession planning. Don't miss out on the opportunity to secure your future in the rapidly evolving wealth management industry. Get pre-approved with SkyView Partners and take the first step toward realizing your business aspirations!