When properly structured and underwritten, many of the concerns that come with lending to an insurance agency can be mitigated. What’s more, utilizing the SBA 7(a) loan program can help protect a lender against credit losses with a guarantee of 75% to 85% of the loan amount.
While the 7(a) program can help lenders reach businesses that may not qualify for conventional financing, it also provides advantageous terms for the borrowers. Both independent as well as captive agencies (think Allstate and Nationwide) benefit from the longer terms, longer amortization periods, low collateral requirements and no prepayment penalty that the program offers. Lending to the insurance industry is an expanding market that lenders should strongly consider. In fact, the Small Business Administration counted 4,686 SBA 7(a) loans to insurance agencies and brokerages for a total of $944 million for the 10 years ended 2015. This lending opportunity is primed to grow even further. With an aging agent demographic, succession planning and retirement will create a huge opportunity for thoughtful lenders to provide important solutions to businesses in need.
As with all SBA transactions, determining eligibility is a critical first step in the process. The SBA has specific requirements when evaluating the borrower and guarantor and it takes a familiarity with the regulations to ensure eligibility.
Lenders without prior experience working with insurance agencies must focus on important underwriting nuances. After determining the SBA eligibility of the borrower, guarantor, use of proceeds and structure of the loan, lenders must also review carrier appointment contracts. While captive 
agencies typically have only one agreement, independent agencies can have many. Each agreement needs to be reviewed under the same standard for affiliation. If the contract includes too much control, it can cause the borrower to be deemed ineligible. Getting these determinations right are crucial when lending to both types of agencies.
The insurance industry can offer further complications when it comes to verification of borrower and seller financials. It is common for acquisition transactions to include only certain lines of business. It is extremely important to understand the best source of financial data may not be the tax returns of the business but rather commission statements provided by the large insurance companies with policies written by the agencies. These statements provide lenders an important validation of the cash flow and creditworthiness of the business being financed.
Lenders should utilize the SBA 7(a) to provide innovative loan solutions to the insurance industry. The program encourages quality loans that generate core deposits and have the potential to create substantial income. The opportunities are enormous, but it is critical that the lender structure, close and service the loan in agreement with SBA rules and regulations and focus on the eligibility requirements to ensure a valid guarantee. Engaging with a third-party expert can facilitate the process, ensure compliance with government guidelines and empower the lender to realize this opportunity.
About the Author: Will McClain manages Windsor’s credit and structure department. This includes interfacing with lenders and other referral sources to ensure eligibility and the most efficient structure for each transaction. Will has helped fund over $400 million in SBA loans.