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There Are Several Ways to Navigate Repayment of a Forgivable Loan

“In many spheres of human endeavor, from science to business to education to economic policy, good decisions depend on good measurement.” – Ben Bernanke, economist and former chairman of the Federal Reserve

Are you interested in going independent but hesitating because you still have years to pay on your forgivable loan? While it may seem like a bad decision to leave your job with a forgivable loan hanging over your head, after weighing these options, you might decide to go for it!

Forgivable loans mean cash up front – but they are designed to lock you into a company for seven to nine years. Advisors who exit before the loan is forgiven must quickly pay the company back in full.

Often, the loans leave an advisor feeling trapped because:

  • They may not have the personal funds available to repay the loan and leave. (Most have spent the up-front payment by that point.)
  • They may fear FINRA arbitration.

How to Successfully Satisfy an Existing Forgivable Loan

There are essentially two ways to pay back your loan and move on:

  • Secure financing on your own and go independent
  • Move to another wirehouse that offers more money in the form of a new forgivable loan.

But of course, the latter just starts the cycle over again, so let's explore option 1.

“Creating an independent firm will not offer the same deal (as going with another wirehouse), but independent advisors have more autonomy, higher payouts, and the opportunity to be their own boss,” said Shad Besikof, Chief Operating Officer and President of TruClarity, a professional business incubator that specializes in RIA independence. “Independent advisors may also be in a better tax situation after their transition. And, if they are fully independent, they move from a captive business model to one that is open, where they can use products and services from all over the industry.”

Are You a Good Candidate?

The best candidates for breaking ties with their forgivable loans and going independent are those who gross more than $1 million per year, want to be a business owner and create a legacy while maximizing enterprise value. If you’d like to customize your clients’ experience without all the wirehouse “red tape” and you’re interested in bringing home more money, this may be the ideal path for you. “As a top-performing independent advisor, you’d be taking home a gross profit margin from 65-68 percent and an operating profit of about 39 percent. Compare this to a 42-45 percent (W-2) payout and it’s worth making the change,” Besikof said.

Advisors who wish to go independent despite a forgivable loan do have options to consider:

  • Banks and private lenders who specialize in RIA financing. Private lenders typically offer a combination of debt and equity with non-controlling interest.
  • Non-Small Business Association (SBA) lenders who provide financing based on an advisor’s credit and predictive indicators of success.
  • SBA lenders who rely on personal guarantees, such as using personal assets as collateral.

How to Manage the Details

Professional business consultants assist advisors in exploring all the options. “We help them model out a current business pro-forma and compare it to what it would look like in their new world,” Besikof said.

They connect you with reliable, experienced lenders who specialize in RIAs and help gather the information needed to begin the sourcing process.

Besikof’s team guides each advisor in determining the best option for their circumstances (SBA, non-SBA, or private lender/equity deal). In the process, they may also suggest that advisors take some equity off the table in exchange for money to pay back loans or for general business purposes. After an advisor chooses the financing source, they oversee the process to make sure the transaction goes smoothly.

Besikof urges advisors to remember that a forgivable loan does not have to be a roadblock on the path to independence. “Just because you have a few years left on your deal doesn’t mean that you can’t leave,” he said. “TruClarity can help you explore your options.”

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