How the Fed’s Rate Increase Impacts Business Loans for Financial Advisors

The Fed has increased the benchmark interest rate by 25 basis points to 1.5%. This is the 5th rate increase since the financial crisis, the third increase in 2017, the fourth increase in the last year, and the Fed reiterated their projection of three more rate increases in 2018 as well.

 

How do the increases impact Financial Advisors and RIAs business loans?

For conventional and Tri-Party loans this rate increase will not have any significant impact on loan rates. Some of the conventional lenders may inch their rates higher, especially for smaller sized loans. The banks providing loans to advisors however, have different variables for their cost of funds other than the Federal Reserve rate for lenders borrowing from other lenders.

The SBA variable rates will be certainly impacted. While the SBA sets a maximum allowable interest rate spread, the SBA lender sets the rates for their loans. While there are three available options, all SBA lenders focused on Financial Advisor lending, use the Wall Street Journal Prime Rate which is typically about 3% above the fed rate.

SBA lenders will charge from 2% to 2.75% above the WSP as the variable interest rate. Smaller size loans typically see a spread closer to 2.75% and larger loans typically see the spread closer to 2%. When the Fed rate goes up, the WSP rate goes up, and the advisor’s variable rate goes up.

 

Keeping rates in perspective

  • Record high 21.5% WSP rate 37 years ago in December 1980
  • 20 years ago, December 1997 the rate was 8.5%
  • Ten years ago, December 2007 the rate was 7.25%
  • 5 years ago, December 2012 the rate was 3.25%
  • 2 year ago, December 2015 the rate was 3.50%
  • 1 year ago, December 2016 the rate was 3.75%
  • Today, December 2017 the rate is now 4.5%

Before the 2001 recession the WSP rate was 9% in January, 2001 and dropped to 4.75% by December.

Before the 2008 recession the WSP rate went from 8.25% in June of 2006 to 3.25% in December 2008 and stayed at 3.25% for 7 straight years.

In 2015 the WSP rate went to 3.5%, in 2016 to 3.75%, and 2017 will end at 4.5%

 

A single rate increase has a nominal impact on SBA loan payments

Since almost all SBA loans advisors utilize are 7(a) ten-year term loans the impact of one rate increase by itself when spread out over the term of the loan is nominal.

An advisor who took out an SBA loan in the last 6 months won’t likely notice the increase. Take a $1,000,000 SBA loan at 2% over WSP rate of 4.25% vs 4.5%

  • Monthly loan payment at 6.25% = $11,228
  • Monthly loan payment at 6.5% = $11,355

The advisor who has had an SBA loan for over 2 years has seen their interest rates go up 1.25%.

At the same 2% over WSP rate example on a $1,000,000 loan the SBA interest rates have gone from 5.25% to 6.5% today.

  • Monthly loan payment at 5.25% = $10,729
  • Monthly loan payment at 6.5% = $11,355

 

Multiple rate increases have more of an impact on SBA loan payments

If there are 3 additional rate increases in 2018, the WSP rate one year from now would likely be 5.25%. Add the same 2% spread example and the interest rate may be 7.25%.

  • Monthly loan payment at 7.25% = $11,740
  • Monthly loan payment at 6.5% = $11,355
  • Monthly loan payment at 5.25% = $10,729

In this example, the advisor who took out a $1MM SBA loan before December 2015 will see their monthly payments increase by $1,000 per month by the end of 2018, an 8.7% increase in monthly payments.

 

Bottom line? SBA loans aren’t going to slow down

Yes, rates are higher than they were in the last 10 years. But they are still just barely over half what they were all through the mid 2000’s.

While no advisor wants to pay higher rates historically, the last ten-year period has seen the lowest WSP rates of any ten-year period since the very first ten-year period immediately following the establishment of the Prime Rate in 1947.

SBA loans will still be in high demand for advisors. The new 2018 SBA acquisition equity injection rules allows for an advisor with $350,000 in annual revenue, with no fixed business debt (and meets other SBA requirements), the ability to qualify for a $5,000,000 loan with 100% financing. There are no pre-payment penalties with an SBA loan. An SBA loan is the easiest type of loan for a conventional lender to refinance.

We don’t see these rate increases keeping the SBA from having a record year in 2018 in loans issued to Financial Advisors and RIAs.

0 Comments