Key takeaways
- The SBA 7(a) loan is a great option for insurance agencies, with low interest rates and long loan terms.
- It can be difficult for insurance agencies to get approved for an SBA 7(a) loan, due to the fact that they may only be eligible for certain lines of business.
- SBA 7(a) loans have terms of up to 10 years for equipment and working capital, and up to 25 years for commercial real estate.
- Insurance agency owners can use these loans to purchase another agency or book of business, build a new insurance agency, or refinancing insurance agency debt.
If you’re an insurance agent interested in starting, purchasing, or expanding an insurance agency, an SBA loan, like the SBA 7(a) loan, could be a great choice.
When compared to many other small business loans, the SBA 7(a) program has low interest rates, particularly long loan terms, and can finance both working capital and owner-occupied commercial real estate. From 2005 to 2015, the SBA guaranteed nearly 5,000 SBA 7(a) loans with a total amount of almost $950 million for insurance agencies and brokers, so if you do get 7(a) financing for your insurance agency, you’ll definitely be in good company.
How to Get an SBA 7(a) Loan for Your Insurance Agency
While the SBA 7(a) loan is often a fantastic option for insurance agencies, it isn’t always easy for them to get approved. In general, the 7(a) program is available for both captive insurance agencies, which are only affiliated with an insurer such as Allstate or State Farm, and independent agencies, which can offer insurance from a variety of providers.
However, if you run a captive agency, your lender and the SBA will take a close look at your agency agreement to make sure that the insurer doesn’t retain too much control over your agency’s day-to-day operations. If they do, you could be considered an affiliate, making you ineligible for SBA financing.
Things may also get more complex if you’re planning to purchase an existing insurance agency, due to the fact that these transactions may only include certain lines of business. Due to that fact, a lender may not only rely on the agency’s tax returns to determine its eligibility for a 7(a) loan: They might also look at the commission statements provided by the insurer or insurers that the agency is working with.
What are the Terms and Uses for SBA 7(a) Loans?
SBA 7(a) loans have terms of up to 10 years for equipment and working capital, and up to 25 years for commercial real estate. 7(a) loans can be approved in amounts of up to $5 million. In general, insurance agency owners can use these loans for a variety of reasons, listed below.
Purchase Another Agency or Book of Business
If you want to purchase an existing insurance agency, or simply purchase the clients of another agency owner who is moving or retiring, a 7(a) loan could be a great way to do so.
Build a New Insurance Agency
SBA 7(a) loans can finance all aspects of the construction process, including security systems, landscaping, construction permits, and more.
Refinancing Insurance Agency Debt
If your insurance agency has a significant amount of business debt, using an SBA 7(a) loan to refinance it could help improve your cash flow. However, the debt must be currently offered to you on unreasonable terms, needs to have been used for business purposes, and you’ll need to prove that refinancing it with an SBA loan would help, not hurt, your finances.
Renovating an Insurance Agency
SBA 7(a) loans can also be used for renovations and property improvements for insurance agencies.
Working Capital
Whether it’s office equipment, or employee salaries during a tougher financial period, the 7(a) loan can be used to make sure your insurance business has the funds it needs to thrive.
Case Study: Establishing an Agency in Northwest Idaho
Kevin, a seasoned insurance agent in Coeur d'Alene, Idaho, had a vision of creating an independent insurance agency that would cater to the diverse needs of the local community. He wanted to offer a wide range of insurance products and personalized services to his clients, helping them find the best coverage for their unique circumstances.
To kickstart his new insurance agency, Kevin needed working capital to cover operational expenses, marketing efforts, and office setup costs. He determined that an SBA 7(a) loan would be the perfect solution to help him launch his new venture.
Kevin applied for an SBA 7(a) loan, requesting a loan amount of $150,000. Upon approval, he used the funds to secure a lease for an office space, purchase necessary equipment and software, develop marketing materials, and invest in advertising to build awareness of his new agency.
The SBA 7(a) loan provided Kevin with the financial support he needed to successfully establish his independent insurance agency. As a result, he was able to offer a variety of insurance products and personalized services to the residents of Coeur d'Alene, growing his client base and building a thriving business.
This is a fictional case study provided for illustrative purposes.
Other SBA Loans for Insurance Agencies
While SBA 7(a) loans are a good choice for most insurance agencies, some with specific, larger needs may find themselves better off with an SBA 504 loan.
SBA 504 loans are specifically designed for funding commercial real estate projects (not working capital), and offer lower interest rates, lower down payment requirements, and larger maximum loan amounts.
Related questions
What are the eligibility requirements for an SBA 7(a) loan for an insurance agency?
In order to be eligible for an SBA 7(a) loan for an insurance agency, the agency must be either a captive insurance agency (affiliated with an insurer such as Allstate or State Farm) or an independent agency (offering insurance from a variety of providers). Additionally, if the agency is a captive agency, the lender and the SBA will take a close look at the agency agreement to make sure that the insurer doesn’t retain too much control over the agency’s day-to-day operations. If they do, the agency could be considered an affiliate, making it ineligible for SBA financing.
If the agency is planning to purchase an existing insurance agency, the lender may not only rely on the agency’s tax returns to determine its eligibility for a 7(a) loan; they might also look at the commission statements provided by the insurer or insurers that the agency is working with.
What are the advantages of an SBA 7(a) loan for an insurance agency?
SBA 7(a) loans have several advantages for insurance agencies. They have terms of up to 10 years for equipment and working capital, and up to 25 years for commercial real estate. 7(a) loans can be approved in amounts of up to $5 million. In general, insurance agency owners can use these loans to:
- Purchase another agency or book of business
- Build a new insurance agency
- Refinancing insurance agency debt
- Renovating an insurance agency
- Working capital
SBA 7(a) loans also offer lower interest rates, lower down payment requirements, and slightly larger maximum loan amounts than SBA 504 loans. Source and Source
What are the disadvantages of an SBA 7(a) loan for an insurance agency?
SBA 7(a) loan disadvantages for insurance agencies include:
- Lengthy approval times (for standard SBA 7(a) loans)
- Lots of documentation
- Collateral is often required
- Certain businesses, including real estate investing, lending, gambling, and speculation are prohibited
- High credit scores are typically required (typically 680+)
- May be restrictions on supplemental/additional financing
What documents are required to apply for an SBA 7(a) loan for an insurance agency?
To apply for an SBA 7(a) loan for an insurance agency, you will need to provide the following documents:
- Agreement to purchase the business
- Letter of intent to buy the business
- Business tax returns for the past three years
- Any outstanding business debt
- Long-term business contracts
- Documentation of business assets
- Business lease agreement
- Incorporation documents and/or business license
- Business plan
- SBA Form 1919 (borrower information form)
- SBA Form 912 (statement of personal history)
- SBA Form 413 (personal financial statement)
- Financial statements, including a balance sheet, profit and loss, and income projection.
In addition, the SBA will usually order an independent business appraisal to give lenders an idea of what the true value of the business is.
The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.
What is the maximum loan amount available for an SBA 7(a) loan for an insurance agency?
The maximum loan amount available for an SBA 7(a) loan for an insurance agency is $5 million. This amount is funded by the SBA with $3,750,000 and the private lender covering the rest.
If you are looking for a larger loan, you can try an SBA 504 loan calculator here.