Time's running out on PPP loans, but RIAs have other options
Execs from Live Oak Bank and DeVoe & Co. discuss SBA and other loans available for financial advisors.
Many RIAs still don’t know about the opportunities available to them under the SBA PPP loan program and could miss out if they don’t apply by the March 31 expiration date, Brad Grubb, managing director at DeVoe & Co., pointed out Wednesday in a DeVoe CapitalWorks webinar.
(On Thursday afternoon, lawmakers introduced a bill to extend the PPP loan application deadline to May 31.)
On Dec. 27, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act — known as the Economic Aid Act — extended the SBA’s ability to make PPP loans under the CARES Act through March, noted Mike McGinley, executive vice president of small-business banking at Live Oak Bank, a provider of SBA loans to the RIA industry.
Program enhancements were also made under the Economic Aid Act, he said. For example, the SBA will now pay one’s principal and interest for up to three months up to $9,000, he pointed out.
The banks also now get a 90% guarantee (up from 75%) through September for 7(a) loans, and that allows banks to “get a little bit more aggressive in lending because they have a higher guarantee,” McGinley said.
Lingering concerns
Although concerns have been raised about the possibility that taking out a PPP loan could hurt an RIA’s business, McGinley said: “Anecdotally, I haven’t really heard much pushback or negative press on businesses taking that money, other than you heard of some of the really large — in some cases publicly traded companies — that took it and a lot of folks felt that they shouldn’t.”
When it comes to taking out a PPP loan or not, he said it still comes down to making a “decision that’s best for your business.”
It is, however, public information when a company applies for a PPP loan, and any company that takes one must attest that they need the money, he said.
McGinley also had not heard of anybody having a problem getting a loan forgiven — “not if they provided the right information and they used it to pay their employees” as they had agreed to do, he said.
Other options
The SBA 7(a) loan program is “good for acquisitions, working capital, debt refinance — things of that nature,” McGinley explained. “All of the acquisitions that we do either fall into that SBA 7(a) bucket or a conventional loan bucket.”
On the other hand, the 504 loan program is “strictly for fixed assets and, for wealth managers, really that’s just real estate,” he said, calling that a “good option” for an RIA firm, “especially when you get into larger dollar amounts.”
The 25-year fixed rate on an SBA loan is a “pretty low rate” now — so that is a “great option,” especially based on where rates are now, he said. “We see a lot of advisors taking advantage of that, almost as part of their succession or retirement plan,” he explained.
For example, you may “retire and you sell your business and you still get a stream of income if the buyer wants to lease that building from you,” he said.
Conventional loans, meanwhile, are “really good options for transactions that don’t meet the SBA eligibility requirements,” such as partial equity transactions, he said. At Live Oak Bank, “we do conventional financing for those and we’re seeing a lot more of those,” he noted. “You can also do conventional financing if the seller needs to stay on for a period of longer than a year.”
The acquisition market
“Right now the acquisition market is hot,” McGinley went on to say. However, because there are “a lot of deals happening, [that] makes it tough for buyers” because it “means there’s a lot of competition,” he noted.
“It’s still somewhat of a sellers’ market, so to get a leg up, we always suggest putting a good team around you,” he said. “That means having the right bank but also the right third-party sources to help you like DeVoe.”
Also important: “Start building a business plan if you want to acquire and start thinking through what that strategy looks like, because there are a lot of serial acquirers out there — or people who have done it before who are doing it pretty well,” he said.
Also, “there is a lot of capital entering the market, between private equity and additional lenders,” he pointed out, adding: “You want to talk to those capital sources pretty early on to make sure that, one, you have the right capital source but, two, that you have that ready to go when you do find a business to acquire, because if you’re competing with others, having that capital there gives that seller certainty that you’re going to be able to close the transaction.”
Additionally, it may make sense to pre-qualify for a loan if you are an RIA firm looking to raise funds, he concluded.
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