Every week, we find ourselves talking to insurance agency owners who’ve found themselves in a tough financial position. They’ve taken out a loan to solve a temporary cash flow crunch, believing they’ll repay it in a couple of months. But they didn’t play out their hand and run the numbers. So they didn’t realize the lender’s fees and interest rates were exorbitant and the terms were undefined. Six months later they’re still paying dearly. This is a trap we see agencies fall into all too often.
“We receive calls from unsuspecting agency owners who’ve been drawn in by the promise of fast, easy money,” relates Peter Friedman, president and CEO of AgileCap. “They call us once they figure out that a fast loan has put their business and livelihood in jeopardy. We always try to help, but sometimes it’s too late."
We don’t want to see one more agency fall victim to predatory lending practices, so we offer this guide to "Recognizing Bad Loans" so agency owners can avoid the perils of ‘easy’ money and bad loans.
Characteristics and warning signs of a bad loan
A bad loan is too expensive to live with. It sucks away your predictable cash flow and commissions to cover its inflated payments. A bad loan consumes your agency’s working capital to such an extent that normal operating expenses often go unpaid.
Lenders who offer these loans are 100% out for their own profit. They don’t disclose straightforward terms and interest rates. Once they’ve got you, they demand surprise payments to fulfill your obligation. They do all this simply to make extra money at your expense. They promise easy money in just 24 to 48 hours to anyone. Even people with bad credit. Or a brief credit history. Or no credit.
Look for these warning signs. Predatory lenders often call their products something other than loans. Instead they may offer “cash advances” or “future receivables purchases” or “sale agreements.” Their loans are extremely short-term, usually less than 12 months. The length of a loan directly affects your payment size, frequency, interest rate, and total cost of borrowing. The shorter the term, the higher the interest rate. Be especially wary of lenders who expect daily or weekly payments.
Too Good to Be True…Usually Is
If a loan (or a lender) seems too good to be true, it usually is. Always trust your gut instinct. The rule of thumb is, if a loan seems too easy to get, you probably can’t afford it.
Here are our two primary tips to help you recognize a bad lender:
1. Beware Lenders Who Aren’t Concerned About Your Business Financials
Trustworthy lenders require significant financial documentation up front. If a lender doesn’t want to see proof of your agency’s financial health, run. If they aren’t concerned about your credit score or financial data, worry. A reputable lender wants to get to know you and your business. They want to understand how you plan to use the money. And they absolutely want to make sure you can repay the loan without sacrificing the solvency of your business. We’ve seen quick loans force business owners into bankruptcy. We don’t want that to happen to you, our potential clients.
2. Beware Lenders Who Disguise What You Owe and When
You should be able to easily do the math and see how your loan will affect your insurance agency’s cash flow and budget. Has your lender provided a loan agreement that clearly spells out terms, rates and payments? Read the agreement thoroughly before you sign it to make sure everything adds up. Consider having a lawyer look at it too. And talk about prepayment before you sign. Make sure no outrageous, unexpected fees are associated with an early payoff or balloon payment.
Upstanding lenders understand they are going into business with you, so your success is tied to theirs. An upstanding lender wants you to succeed and thrive. They are not aggressive or harassing. They respond to your initial inquiry and let you decide if their products suit your needs. They are transparent – you know your terms and there are no surprises or caveats. Your questions and concerns are easily answered by calling one number and talking to one person. The financer and the servicer are the same entity.
A Real World Story of a fourth quarter cash crunch
One of our clients - a successful agency owner - experienced a fourth quarter cash crunch. In order to get through it, he secured three different cash advance loans from two quick lenders. He planned to use the funds to expand his insurance agency during the traditionally tight fourth quarter. Because of a past bankruptcy, he believed he’d be unable to access financing through a traditional or specialty lender. His collective decisions to use quick lenders were costing him dearly in fees and interest charges. And the loans had not provided enough capital for his needs. So he reached out to AgileCap for help.
Fortunately this owner ran a very profitable agency. He could afford – at least short-term – the almost 90% APR the quick lenders were charging. We quickly came in and ran the numbers. By refinancing and consolidating the cash advance loans, AgileCap saved the owner a staggering $30,000 per month in debt payments. He no longer needed additional capital from yet another loan. Instead he used the money he saved by refinancing and the resulting improved cash flow. This was enough to fund the remainder of his insurance agency expansion.
This is an atypical scenario. Most agencies who take on quick loans aren’t able to afford the very high APRs that come with them. If you couple that with the fact that most agencies don’t do the math when they take out a quick loan, you can see how quickly an agency can get in over their head, and end up completely exhausting their cash flow when paying off their quick loans.
If you find yourself in a similar situation to the agency owner above, we may be able to help
One of our Lending Advisors can quickly determine if we can get your business on better financial ground. Your best bet is to educate yourself and never enter into an agreement with a predatory lender. We hope this information helps you avoid costly mistakes.
Avoid predatory lenders by contacting a reputable insurance lender like AgileCap to fund insurance agency growth. Our ultimate goal is to fund insurance agency growth, earn acceptable returns, and build long-term relationships. We’ll ask strategic business questions that will help us understand your agency goals, objectives and financials. Once we’ve designed your insurance agency’s custom lending package, you’ll find that the terms of your loan are reasonable and transparent. There will be no surprises.
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