When taking out a loan to acquire a practice, conduct a partial or full partner buy-out, or refinance a loan, one consideration that you'll come across is interest rate and whether the interest rate is going to be fixed or variable. Fixed interest rates are going to lock in a specified rate for a specific term of your loan; whereas variable interest rates will be fluctuate throughout that term and can either increase or decrease your monthly payments.
Benefits of Fixed Interest Rates
Historically, at Advisor Financing we have found that fixed interest rates tend to be preferential for a variety of reasons. From a cash flow perspective, fixed interest rates allow you to properly plan exactly what your monthly or quarterly loan payment will be for the entire term of your loan.
When you look at fixed interest rates, from a banking perspective this can be a risk because of potential future changes to lending rates that are common amongst banks. However, fixed rates also allow banks to know exactly what rate and income they will be receiving on each loan throughout the term of the loan. In this niche space of providing financial advisor loans, our banking partners are comfortable with the potential risks and able to offer the most competitive rates in the industry.
Finally, especially in the current rising interest rate environment, locking in a fixed interest rate will allow independent advisors the peace of mind knowing that while the environment changes, you have locked in a fixed rate for the term of your loan. Many financial advisor loan interest rates are tied to the Prime rate, which is currently the rate banks use to set for various loans. Less than 24 months ago, the Prime rate was a full 325 basis points below where it currently sits today at 7.5%. Dependent upon the size of your loan, a 325 basis point interest rate increase could result in tens or hundreds of thousands of dollars additional in interest payments.
Benefits of Variable Interest Rates
There is a reason that historically, almost every single loan Advisor Financing has helped independent advisors close upon has been tied to a fixed interest rate. Quite simply, variable interest rates can be close to that of fixed interest rates - however, generally fixed interest rates are lower and allow for the benefits we've mentioned above.
Over the past several years, many advisors did benefit from having variable interest rates when their interest rate - and thus loan payments - decreased significantly when the Federal Funds rate was lowered. Now that we are in a rising interest rate environment, these same advisors are seeing their rates and loan payments increase quickly.
A question we have heard in late 2022 and early 2023: wouldn't a variable interest rate be better in the event that interest rates do fall? This is a perfectly logical question, however at this point in time it is still expected that interest rates tied to Prime continue to rise, or at best, level off. However, if a variable interest rate is a preference for our advisors we do ultimately act as advocates and will work with our partners to give you flexibility and options between both variable and fixed interest rates.
Let Advisor Financing Be Your Advocate
Our team has worked with thousands of independent financial advisors and registered investment advisors, helping each individual to secure the best rates and terms when needing capital for acquisitions or internal transitions. Allow us to be your advocate in ensuring you also receive the best rates and terms for your unique situation. We are always willing to provide education and resources for you, allowing you to be in the best position possible. Contact us today for a complimentary consultative phone call.
