RIA Financing: Is SBA Funding Your Best Solution for Growth?
January 27, 2021 •Oak Street Funding
RIAs who want to grow their firms may assume the best choice for financing is a Small Business Administration (SBA) loan. However, SBA loans aren’t necessarily the best option for RIAs. It may make more sense for firm owners to turn to other sources for the capital they need.
SBA loans are bank loans
One of the biggest misconceptions about SBA loans is that they are made directly by the U.S. government. In reality, banks and other lenders provide the loans to borrowers. The administration helps protect the lender if the borrower defaults on the loan, and sets rules for interest rates, lending limits, and other key terms. Applicants must operate for-profit businesses in the United States and have equity to invest. In addition, the SBA requires businesses to meet certain size standards to apply for their loans.
SBA loans have comparatively small lending limits
Several SBA loan programs can provide working capital or finance the purchase of inventory and commercial equipment. There are three common types of SBA loans, each with different lending limits and allocations for use:
- 7(a) loans – up to $5 million for working capital, refinancing, or purchase of furniture, fixtures, and supplies.
- 504 loans – up to $5.5 million for long-term fixed asset purchases like property.
- Microloans – up to $50,000 for working capital, inventory, supplies, equipment, and machinery. The maximum repayment term allowed is six years.
Those limits may not be high enough for an RIA firm owner’s objectives.
Advantages of SBA loans
The SBA program helps business owners who might have difficulty qualifying for loans on their own get access to the capital they need. The SBA's guarantee gives lenders an incentive to make loans they might otherwise reject. In addition, interest rates on these loans tend to be lower than comparable bank loans because of limits set by the SBA, and the repayment terms allow borrowers to get longer terms with lower monthly payments.
SBA loans have many disadvantages
While the government established SBA loans to make funding available to smaller businesses, these loans come with many disadvantages for borrowers, including:
- Credit qualifications. Borrowers with lower personal credit scores may not qualify.
- Personal pledges. In addition to a pledge of business assets, the SBA typically requires a pledge of personal assets, (such as the borrower’s home) as collateral, as well as a spousal guarantee.
- Cost. There may be a hefty down payment.
- Slow process. The approval process can take longer than other types of loans, and there may be delays in getting funds once the loan has been approved. Depending upon the lender’s relationship with SBA, RIA firm owners may need to go through separate approval processes with the bank and SBA.
- Physical collateral. Bankers typically base their lending decisions on physical collateral such as real estate and inventory. Assets under management are most RIA firms’ primary asset. Many traditional bankers are uncomfortable making loans against intangible assets such as future fees. They don’t want to assume the risk associated with quantifying such an asset.
Alternatives to SBA funding
Some owners decide to obtain what’s known as unsecured funding, which includes using credit cards to obtain the capital they need. Unsecured funding may be easier to obtain but generally carries higher interest rates. Another approach is using crowdfunding, in which the owner posts their need on a website and interested individuals contribute funds.
A better alternative for RIAs
A better alternative for many RIA firm owners is turning to a specialty lender that offers cash-flow-based loans funded on future fees. Lenders who use the cash-flow method, such as Oak Street Funding®, have a deep understanding of how financial services professionals such as RIAs operate their businesses. In fact, Oak Street Funding has been making loans to RIA firms since 2016.
Oak Street Funding has the flexibility to customize lending packages based on a firm’s cash flow stream -- which is often viewed by other lenders as intangible -- for everything from acquisition funding to business debt consolidation. We can lend up to $50 million without requiring a lien on personal assets or a spousal guarantee. Loans can be structured to accommodate phased successions or involve multiple transactions within a single financing. In addition, Oak Street Funding will own and service the loan throughout its term and will not sell it to another organization*. Clients will be assigned an account manager, who will work with them for the life of their loan.
Investigate before applying
As with any significant business decision, RIAs should carefully study all the available choices before deciding on a specific lender or type of loan to satisfy their RIA financing needs. It's also wise to consult with trusted advisors to ensure you have considered all aspects of the decision to get a loan. By taking these steps, you will be more likely to choose the financing option that is right for your needs and your situation.
* Subject to terms of loan documents.
Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.