Your independent insurance agency needs a loan. Maybe you’re purchasing another agency. Maybe one stockholder is buying a retiring one’s shares. Maybe you’re upgrading the agency’s technology or expanding your office space. Whatever the expense is, it is too large to pay out of reserves. The agency needs financing.
Insurance agencies, though, are unlike other types of businesses, and a traditional bank might not understand that. The differences might present obstacles to getting that loan.
Traditional banks typically make loans to borrowers who put up hard assets as collateral. A building secures a mortgage, a car secures a car loan, and equipment secures equipment loans. Most of an insurance agency’s value, however, is not in hard assets such as buildings and equipment. Rather, its value is intangible – it’s in the book of business with its expected future stream of commission and fee income.
Traditional loan underwriters may not be comfortable with lending based on an expectation of future revenue streams rather than on hard assets. Some may be reluctant to extend loans at all or they may offer terms unfavorable to an agency.
However, there are lenders who have made a niche out of servicing insurance agencies. These lenders understand how insurance agencies are different from other potential borrowers and are unafraid of those differences. They are prepared to make loans to help agencies grow, buy out retiring partners, or meet unexpected short-term expenses. There is a list of lenders who specialize in loans to insurance agencies elsewhere on this website.
To make an effective case for why a lender should make a loan, an agency should assemble financial information covering periods of several years, including:
●Balance sheets
●Cash flow statements
●Credit reports on both the agency and the owners
●Tax returns
Traditional lenders may look at only the agency’s credit history. Niche lenders recognize that most agencies are small firms owned by one or two people. They therefore consider both the agency’s credit history and that of the owners. Insurance agency lender Wildhawk Capital recommends that all partners review their personal credit reports and fix any errors. They also recommend paying down personal credit card balances to 30% or less of the limits and filing tax returns as soon as possible.
Niche lenders are more concerned with an agency’s cash flow than they are with tangible assets. A healthy cash flow ratio is one where cash flow divided by expenses equals a number greater than one. This indicates that the business is taking in more than it spends each month. Higher cash flow ratio numbers are always better. An agency with a consistently high cash flow ratio will be attractive to niche lenders.
Lenders also look at a firm’s “current ratio,” which is a measure of how much the firm has in liquid assets to pay off short-term liabilities. Agencies should have a current ratio of at least 1.5, meaning that the firm has at least $1,500 in cash and other liquid assets for every $1,000 in short-term liabilities.
Agencies with strong balance sheets, healthy cash flow, clean credit histories, and no outstanding judgments or regulatory actions against them will be most attractive to lenders. The loans that may be offered will vary in terms of:
●Amount the lender is willing to risk
●Duration, with shorter repayment periods for shorter-term projects
●Interest rate, with the most attractive borrowers receiving the lowest rate quotes.
It is important to understand how the loan payments will work. The lender may automatically withdraw payment amounts from the borrower’s bank account. This may be done on a daily, weekly, or less frequent basis. Because of this, it is important for the agency to have adequate funds in its account to cover these withdrawals.
Judging from the dramatic rates of mergers and acquisitions activity over the last several years, lenders increasingly see insurance agents as safe investment bets. A well-run agency seeking credit for expansion or other uses should be able to obtain loans from these niche lenders in amounts and terms that fit their needs.
