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Talking with the largest SBA lender in America: Live Oak Bank

By April 13, 2021July 13th, 2021Agency Management Moments

In our second podcast with Michael Strakhov, head of Insurance Lending at Live Oak Bank, we talk about Small Business Loans: who they work for, why now is a great time to borrow, and what to expect when working with Live Oak Bank. Tune in to hear from the bank that is the largest SBA lender to independent insurance agencies in America. Tune in here for the first episode we recorded with Mike.

Largest SBA Lender in America

Edwin K. Morris (6s):
Welcome to the trusted advisor podcast brought to you by Iroquois Group. Iroquois is your trusted advisor in all things insurance. I am Edwin K. Morris. Joining us back in the studio is Mike Strakhov from Live Oak Bank. Mike is the head of Insurance Lending at Live Oak and has over 33 years in the insurance industry. Mike has worked as a claim adjuster, commercial producer, personal and commercial lines marketing manager, and the head of a large multi-state agency. If you haven’t listened to the first episode with Mike, we will make sure to drop it in the show notes so you can check it out. Welcome back, Mike, can you tell me a little bit about the SBA loan and who’s really best suited for that in the insurance world?

Mike Strakhov (52s):
Absolutely. So the SBA, you know, it gets thrown around the, you know, the, the three letters for the acronym SBA. So the small business administration loan program is really meant for a small, obviously small businesses, but what really defines a small business is, you know, in the eye of the beholder to some degree. This program is available to those that, you know, come to mind most as a small business, but many businesses are eligible to access to this program. So I would say from

Edwin K. Morris (1m 19s):
Is it a cap by dollars or number of people or what?

Mike Strakhov (1m 22s):
Okay, so the cap is $5 million per borrower, or so each loan will have a guarantor. So it’s $5 million per guarantor, which is in individual banks like Live Oak, we could do a much larger lone. We can access the 5 million through the SBA and then put what we’ll call conventional or non SBA dollars on top of it to create a loan program that’s significantly larger, you know, 10 million, $15 million. But that first $5 million is through the SBA program, and many of the terms will be dictated into those higher levels or a larger amounts that, or that are available from a credit standpoint, based on, you know, kind of that baseline that the SBA creates on that 5 million

Edwin K. Morris (2m 5s):
What’s the difference between what you’re talking about as far as SBA loan versus the economic aid act?

Mike Strakhov (2m 12s):
Okay. So the economic aid act was passed by the Trump administration just before the end of 2020 as an effort to provide stimulus dollars to the economy. And part of that act was designated or earmarked. The funds from that act were earmarked for the SBA program and, you know, practicality, the main benefits to borrowers that now seek an SBA loan under the economic aid act is first any SBA fees. So historically, or, you know, outside of the economic aid act, somewhere between two to two and a half percent of the loan amount is typically collected on every SBA loan to fun, the program and, and overhead and things of that nature while the economic aid act now waives all of those fees.

Mike Strakhov (2m 56s):
So the borrowers don’t have to pay those fees. So it’s a definite a immediate benefit. And then the second piece is that, for the first three months, you know, so the first three payments a borrower has, the SBA will pay principal and interest payments up to $9,000 per month for that first three months. So a $27,000 benefit to SBA borrower who now closes a loan between,we’ll say today, because it was at the end of March through the end of September, it would be eligible for that program. The only caveat I would make it’s, you know, while supplies last, so only a certain amount or a finite amount of dollars were, were applied to that program.

Mike Strakhov (3m 38s):
So in some sense, it’s the first come first serve. We’re not trying to make this a price goes up Monday, hard sell type thing, but it is actually a situation where the dollars could run out. So if you are thinking about a loan, now, it was a great time ’cause again, interest rates are at an all time low, which is a benefit that you would receive as an SBA borrower at this point.

Edwin K. Morris (3m 59s):
Yeah. Are you recommending folks’ to go through the SBA program first, before they come to you? Or did they start the process with you?

Mike Strakhov (4m 6s):
It’s a great question. So the way the SBA program works is it’s actually put out to the private sector. So Live Oak Bank is approved by the SBA to generate SBA Loans, and it’s actually Live Oak dollars that are lent to a borrower. As long as we follow all of the rules set up by the SBA, the Live Oak is, has the benefit of a 75% guarantee of the federal government in the event of default. So the benefit to the, to the bank is that that guarantee is out there. So then now you get the ability to maybe do things that you might not otherwise lend to, or a class of business you might not otherwise lend to without that guarantee.

Edwin K. Morris (4m 44s):
I see that you’re noted as the nation’s top SBA lender, what does that mean?

Mike Strakhov (4m 50s):
So we generate by loan volume, more SBA loans than any other bank in America. There might be some household names that you might think would be a above that, but I would say for the last three years Live Oak Bank is the largest SBA lender in the United States’ by loan volume. And we are also the largest SBA lender to insurance agent’s by loan volume. So we do more SBA loans for insurance agent’s than any other bank of America,

Edwin K. Morris (5m 16s):
As the climate has changed in the political structures of this country, what’s going to change in two to three years in this type of world of financea of small business?

Mike Strakhov (5m 30s):
I’d love to have the, the crystal ball on, on the plethora of things that could change. You know, what we see on the immediate horizon. And, you know, some of the things that we’re talking about during the most recent presidential campaign and some of the intentions of the Biden administration, particularly as it pertains to potentially changing the long term capital gains, that alone is, you know, potentially something that will impact almost every agency owner. It looks like this point, and obviously nothing’s finalized, but it looks like for any type of long term capital gains over a million dollars, it could be a scenario where it could actually double. So if you’re an agency owner right now, and you might see yourself on maybe one to three year window on selling your agency, there might be a pretty strong argument to consider doing it before a change to the tax law.

Mike Strakhov (6m 21s):
If you’re looking to maximize, you know, the benefit of, of the sale of the agency. Beyond that, the SBA really has been a pretty consistent program. It has a support on both sides of the aisle. Everyone loves a small business, and small business, in many respects, is the engine that drives the economy. So the SBA program, as it stands today will probably look pretty similar. We have seen a lot of changes in the past and we’ll say a year or so as a result of the pandemic. And it shows you how the government views the SBA as a tool to fuel or a lending at that at times where they think that they need to put those dollars out into the economy. Sure.

Mike Strakhov (7m 1s):
So I will continue to see the SBA in the forefront of all of those types of initiatives,

Edwin K. Morris (7m 5s):
To wrap things up, what would be your suggestion, or what would an agency bring to you? What should they have ready to go when they start this process?

Mike Strakhov (7m 14s):
And it, it, it goes back to really your initial conversation on kind of who’s the profile or the initial question, who is the profile of the agent that is a good candidate for an SBA loan. So, you know, there are a number of things that we look at it, but I would say from a very high level cash flow is King. So if you are seeking financing from whether it’s Live Oak, whether its an SBA loan or, you know, any type of a banking institution, most of them will believe it or not, they are going to start with we want to make sure that you can pay us back. And that begins with cashflow. Unfortunately we do get approached by a number of agents that just don’t show a profit in their numbers for whatever reason, many times it’s a, the effort to reduce the tax burden, which I get totally understand.

Mike Strakhov (7m 57s):
But on the other side of that, you can’t expect to take those financials and expect to get a loan. And so when you get uncomfortable with a quickly, if the business hasn’t made money in sometime, so my advice is to run your agency like the business, run it like you are going to sell it tomorrow because you might have to, because there are a lot of variables in life and things happen. So if you can’t turn it around, many of these things over night, it does take time so making sure you were running the agency profitably and then really, you know, understanding your numbers are running in each shop, you know, we’re doing a good job is to make sure that you’re, you’re, you’re running an efficient agency. And that’s something that, you know, somebody with a keen eye can pick up pretty quickly,

Edwin K. Morris (8m 33s):
Can you give us an estimate of time that it would take from start to finish or, or is there a long process as far as getting this through the hoops?

Mike Strakhov (8m 43s):
So that question is one of the first we typically get when we engage an agent. And really, I would say assuming everything goes according to plan and, and you know, you get the information to us as we requested, 45 to 60 days is really where we close the vast majority of our loans, where they get hung up is when, you know, the agent doesn’t have their house in order and can’t find their corporate documents. And, you know, there’s other items that are just not readily available that take time to get. So some of that is out of our control, but we claim to work and, and feel proud that we can react at the speed at which we receive information, but if we don’t receive it, people dragging their feet in many times and an acquisition, there’s a third party involved that isn’t necessarily within the borrower’s control.

Mike Strakhov (9m 25s):
So we understand that as well, but we will react as quickly as we receive the information.

Edwin K. Morris (9m 30s):
How long do you predict the finances to be floating around and available?

Mike Strakhov (9m 36s):
It’s it’s a great question. I would say that historically, if you just look at the M&A activity for insurance agents, even over the last five years, its been for lack of a better term, very robust. And there’s a lot of reasons for that. And one of them, you know, private equity is very active in this space. Insurance agents are a great business model and people appreciate that. And just the recurring revenue aspect of an insurance agency that is a very, very attractive, there’s not many businesses out there that mimic, you know, the business model of an independent insurance agency. I would expect an insurance agency financing to be around by those banks and institutions that understand the business and want to be involved in it for, you know, for the foreseeable future.

Mike Strakhov (10m 23s):
It’s really things like the long term capital gains in some of the things that might impact the deal flow. But I think you’ll have interested institutions to lend to agents for, for some time.

Edwin K. Morris (10m 34s):
Thank you very much Mike it was very, very engaging.

Mike Strakhov (10m 38s):
Thank you. I appreciate the opportunity.

Edwin K. Morris (10m 41s):
Thanks for listening to this edition of the trusted advisor podcast brought to you by Iroquois Group. Iroquois, your trusted advisor for all things Insurance and remember, get out of the office and sell. I am Edwin K. Morris, and I invite you to join me for the next edition of the trusted advisor podcast.

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