Borrowing for Agency Growth: Understanding Good vs. Bad Debt

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Borrowing money for growth can be a winning proposition if you borrow carefully and wisely. Whether it’s acquired for personal or business use, there are really two types of debt: good and bad. Understanding the difference is simple. Good debt propels you or your agency forward and puts you in a stronger financial position. Bad debt finances cash flow concerns, does not result in growth, and can put you in financial jeopardy.

Taking on good debt involves strategic, responsible borrowing. “For insurance agency financing, it’s almost better to replace the word ‘debt’ with ‘leverage’,” explains Kyle Castle, Lending Advisor at AgileCap. “By taking out a loan, you leverage the lender’s money to attain an achievable goal. The objective of this venture is to increase your profits and the overall value of your agency.”

It’s important to think of debt as a strategic tool and to follow these three fundamental rules of borrowing.

1) Always borrow for growth or improvement.

2) Never borrow more than you can afford with your current earnings.

3) Understand exactly what your borrowing costs will be and get the best rate and terms available to you.

Borrow for Growth or Improvement

“An appropriate working capital loan brings cash into the agency,” says Kelly Drouillard, General Manager of Insurance Lending at Live Oak Bank. “You can use this cash for specific growth plans like hiring a producer or upgrading technology. Remember that working capital loan obligations need to be affordable based on the existing cash flow of your agency and not future projections.” (Check out Kelly’s article on the “7 Deadly Sins of Excessive Debt”.)

Never Borrow More Than You Can Presently Afford

If you have to generate new business to cover your loan, reconsider borrowing. If new sales don’t cover the debt, you’ll compromise your working capital and profits, and put your agency at risk.

Bad debt pays for current expenses but won’t bring future income or growth. Loans obtained to fund unforeseen or personal expenses, cash flow problems, or items that depreciate in value are dangerous territory. You can avoid bad debt, which often involves high interest rate emergency loans, by planning ahead and budgeting within your means.

Understand the Cost of Your Loan

Loans come in many types from a range of lenders with widely varying costs. So navigating the good and the bad of business financing options can be confusing.

Banks and SBA lenders offer the best rates by far. However, your business needs to be profitable and well-established, and processing can take months. As an alternative, specialty lenders offer flexible terms, fast processing speeds and some lenience regarding credit issues. Depending on the lender and your financial and credit history, as well as your business profitability and industry experience, your interest rate may be higher than market rates.

Cash advances and credit cards are bad debt… period,” states Stephen Ludwig, CEO of Select Insurance Group. “However, oftentimes start-ups have a tough time finding funding and take what they can get. These debts can be a heavy burden if not managed appropriately. If you’ve taken on this type of debt to boot strap your young agency, make sure you never take out more than you can afford and have a plan to refinance it out or pay it off just as soon as you have profitability and time in business to get it resolved.”

With responsible financing, as long as you repay your loan on time, you’ll know your exact borrowing costs. Debt becomes more affordable if you can deduct the interest and principal on the loan from your business taxes.

Your choice of lender matters

Whichever financing solution you choose, try to find a lender that understands the insurance industry and supports your goals and objectives. At AgileCap, we’re proud to provide fast and flexible financing for insurance agencies. We deliver customized financial solutions that meet your very specific lending needs and timelines.

If you’re ready to talk about financing your growth plans, use the form below to schedule a complimentary consultation with one of our Lending Advisors today.

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