There are many benefits to SBA loans, and lots of insurance 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.
Small Business Association (SBA) loan programs offer many advantages for small businesses, and can be a great way for you, as an insurance agency owner, to obtain the funding to buy, build or grow your business.
With the economic aid passed by Congress in early 2021 (Economic Aid Act), SBA loans approved between Feb 1, 2021 and Sept 30, 2021 will receive some significant enhancements, making them an even more attractive option. The SBA will pay the principal and interest on these loans for a number of months with no SBA fees (within limits and subject to change).
This can obviously be a very attractive option for agencies looking to grow through either acquisition or organic growth. While we’re not an SBA lender, we do recommend this program to some agency owners. If you are not in a rush to get your funds, have adequate commission revenue, two or more years in business, a personal FICO above 700, and expect to have a relatively straightforward, uncomplicated loan structure, an SBA loan could be right for you.
For agency owners who don’t meet the above requirements or qualifications, though, it can be frustrating to find that you’re not eligible to take advantage of an SBA loan program.
If you’ve applied for an SBA loan and were denied, don’t be disheartened. You have other options for borrowing. Here are the next steps you should take to find the funds that can give you the financial flexibility to achieve your business goals.
Evaluate the reason for your SBA loan denial
You’re entitled to a written letter of explanation, either from the SBA or the SBA lender who denied your loan. Request an explanation for your denial.
Common reasons for a loan denial include:
- Your personal credit score is below the lender’s threshold.
- Your credit history includes red flags (eg: past bankruptcy).
- You lack adequate collateral.
- Your business revenue or cash flow was considered too low to repay the loan.
- You have too much existing debt, which could impact your ability to repay a new loan.
Understanding why your application was denied can put you in a stronger position to apply for a loan with a new lender right away or to reapply with the SBA at a later date.
Check your credit report
Your credit score is used along with other factors (eg: agency commission revenue, collateral, time in business) to determine your eligibility for a loan. A lower credit score – personal or business – is the most common reason that an SBA loan is declined.
Your credit score is based on a number of factors that are carefully considered and weighted as follows:
• Your bill and debt payment history (35%).
• The amount of money you currently owe (30%).
• The length of your credit history (15%).
• How much new credit you’ve taken out (10%).
• Your credit mix (10%).
Personal credit scores are rated between 300 and 850. The SBA cutoff is generally around 620. Many lenders want to see closer to 700+.
The SBA uses the Small Business Scoring Service to prescreen your agency’s business credit score. These scores are rated between 0 and 300; The SBA’s cutoff is generally around 140.
If your personal or business credit scores are beneath the SBA’s threshold limits, you’ll need to improve your credit, which is do-able but it takes some time.
Over time, the following steps can improve your credit score:
- Pay your business and personal bills on time.
- Decrease the amount of credit you use, relative to how much credit capacity you have (a credit utilization ratio of 15-25% of your total available credit is good to aim for).
- Pay your credit cards in full each month.
- Use your credit card’s high balance alert feature so you can stop adding new charges.
- Limit your requests for new credit.
- Keep old accounts open even if they don’t have a balance.
- Resolve any delinquent accounts through a payoff or settlement.
- Consider consolidating your existing debts, whether they’re loans or credit cards.
Some non-SBA lenders have the latitude to consider borrowers who have blemishes in their credit history, provided there is a credible explanation for the credit blip, and/or evidence that would support the fact that, as a borrower, you’ll be a reasonable credit risk going forward. Even with a lower than ideal credit score, in the wake of a loan denial, it’s worth having a conversation with a new lender to see if they can work with you.
Take a good hard look at your finances
Let your loan denial serve as a wake up call to take a step back and focus on your agency’s financials. Your financial documents tell an important story about your agency. It’s a story that you should know and be in control of.
In particular, make sure you understand your cashflow. It’s possible that the SBA lender’s assessment of your loan application led them to believe that your cash flow wouldn’t adequately support your loan repayment at this time.
Consider for yourself whether your agency is able to cover its fixed and variable costs, along with any existing debt payments, taxes, and operating expenses, while also covering any new debt payments you’ll be taking on with the loan you’re considering taking out. If the margins are tight, where could you make changes to increase your revenue or decrease expenses, in order to make your cashflow more stable? It’s also possible that you just need some additional time – months or years – in which to establish a stronger trendline in your agency’s cashflow, which will tell a new financial story to a lender.
Look for a different source of funding
SBA guidelines state that a borrower has to wait 90 days after receiving a denial notice before they can reapply for an SBA loan. If you need funding more quickly than 90 days, finding a new lender may be the best idea for you.
You could try using unsecured credit, like a credit card but – of course – that funding is expensive, as it comes with much higher interest rates.
A specialty lender is able to customize funding so that it suits your agency and your business goals. As a specialty lender, AgileCap gets to know you and your agency so we can be flexible in considering your credit capacity and we don’t require personal assets as collateral. You work with one Lending Advisor throughout the entire process, and we maintain and service your loan for the entire life of the loan. We can handle complicated structures, and we can arrange for bridge loans that allow you to reapply for an SBA loan as soon as you’ve strengthened your credit picture and therefore your application.
The bottom line is, if you’ve been denied for an SBA loan you still have funding options. We speak with agency owners all the time who are looking to grow their agencies, and we help them see what funding can do to support their business plans…whether or not we’re the first lender they’re speaking with. One of our experienced Lending Advisors can spend 30 minutes with you and be able to explain clearly what’s possible so you can make a sound borrowing decision for your agency.