When an agency growth opportunity arises, timing and funding are everything.
As an insurance agency owner, if you don’t have personal or investment capital on-hand, you need to find business financing quickly or risk losing out on the opportunity.
A common place for agencies to look for financing is through the SBA. There are many benefits to SBA loans, and lots of agencies are finding that this is a particularly good time to apply for them.
Unfortunately there are some downsides to an SBA loan that borrowers can encounter. One downside we’re hearing about lately is the length of time that SBA loans can take to be funded
A little background on SBA loans
Small Business Administration (SBA) loans are very attractive to agency owners because they’re easily accessible, the application process is relatively simple, and they feature lower interest rates and longer repayment periods than you might find with other lenders.
There are a number of different loan products provided by the SBA. The 7(a) loan program is their primary vehicle for providing financial assistance to small businesses.
Applicants should understand that the SBA doesn’t actually do the lending, though. These federally-backed loans are issued by SBA-vetted, designated intermediary funders like local or national banks, credit unions, or other financial institutions. You apply for an SBA loan through this intermediary funder. If they feel you meet all the SBA’s criteria, that institution will apply for a loan guarantee for you from the SBA.
For collateral, the SBA requires an unconditional personal guarantee from every person with 20% or greater ownership in your agency. The assets you use as collateral can include real estate, office equipment, accounts receivable, inventory, and personal property. If you lack such business assets or you or your business partners are not comfortable putting personal assets at risk to guarantee a loan, you may run into a roadblock with the SBA.
In early 2021, Congress passed an economic aid package that is impacting SBA loans approved between February 1 and September 30, 2021. The SBA will pay the principal and interest on these loans for a number of months with no SBA fees. (This promise is subject to certain limits and can change.) This offer has understandably generated a lot of interest in SBA loans. Unfortunately, it has also caused many backlogs in loan application queues at both the intermediary lender and federal SBA levels.
SBA loans can take longer to fund than borrowers expect
For most lenders, there are four main steps in the lending process: application, approval, closing and funding. What varies from lender to lender is the length of time each step requires, which impacts the overall time the process will take to complete. The size of the loan, its purpose, and the experience level of the lender will also affect the exact timeline for SBA loan funding.
A number of interrelated factors can contribute to longer wait times for SBA loans:
- The fact that both the Small Business Administration and an intermediary lender are involved in approving your loan means there are multiple layers of administration, paperwork, and approval. Those steps, and the fact that they're executed by two separate institutions with their own timelines, means that the total time to fund an SBA loan can really add up. Both party’s processes must be completed before funds will be issued to your agency.
- The list of documents that the SBA requires as part of its loan application varies depending on the amount of the desired loan, the age of your agency, and the number of borrowers on the loan application. In general, the SBA requires more documentation than some other lenders. If you’re not prepared in advance, the time it takes you to gather up-to-date documentation can lengthen application time and greatly extend the time it takes for your loan to be funded.
- In the current economic climate, rendered even less predictable by pandemic-related issues, many people and companies are applying and competing for available loans. This competition has contributed to a backlog of loan applications that are now hung up in the intermediary funder’s and/or the federal SBA’s approval process.
If you don't anticipate the delays involved in each step and factor sufficient wait-time into your overall expectations for receiving funds, the sluggishness of the application and approval process for an SBA loan can be very frustrating. If your loan will be used to finance the purchase of a book or agency, failure to secure funding on a seller's timeline can threaten a deal or cause you to miss a valuable growth opportunity.
There are alternatives to SBA loans for insurance agency owners
While we don’t offer SBA loans at AgileCap, we regularly inter-refer with lenders who do, so we’re very familiar with the products. We know there are many benefits to SBA loans. We also understand there’s no one-size-fits-all best loan product, and encourage any borrower to consider each and every aspect of a lender and a loan product when seeking funding. The length of time it will take to receive your funds can be a critical variable and must be factored into lender selection
If you find an SBA 7(a) loan is not right for you because you need funding faster than your SBA/local lender partnership can deliver, there are other SBA loan products that you could consider. For smaller loans, of $350,000 or less, you may be able to apply for an SBA Express Loan. The turnaround time for SBA approval of Express Loans is 36-hours, but the vetted lender also has to approve the loan, a process that can add several weeks. In the end, you could still be looking at 30-60 days for funding under either SBA program.
Traditional bank loans are another possibility. A bank may be able to get funds into your account faster than the SBA, but you may need to put up physical collateral or provide a personal guarantee with these lenders as well. Many agency owners are not able or willing to take on such risk.
Another option is a private, specialty lender that will be able to design and deliver a customized loan package on your timeline. The application process for such lenders tends to accommodate tighter funding deadlines. Often a preliminary term sheet can be delivered in 24 hours, and funds can be accessed in as little as 7 to 10 business days.
For those agency owners who are set on an SBA loan but need funding on a tighter timeline than the SBA can meet, specialty lenders can also provide bridge financing. This option allows you to secure specialty funding in the short term – for example to meet a specific deadline for an acquisition opportunity – and later go through the more lengthy application process for an SBA loan. The SBA funds can then be used to pay off the balance due on your shorter-term specialty loan.
It’s never too early or too late to talk about funding options
If you’re considering funding for your agency and you’ve looked into an SBA loan but discovered that the funding timeline is longer than you expected, remember that you can still investigate and discuss other funding options. As a specialty lender, AgileCap’s experienced Lending Advisors will walk you through the process and design a loan that suits all your agency’s needs, especially your funding timeline.
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