Understanding Commission-based Loans for Insurance Agencies

You know that growth is a priority for your agency. You’ve determined your growth strategy. You know how much debt you can responsibly take on. Now you need to find the right lender. As an agency owner, you may discover that it’s challenging to find lenders who offer loans to insurance agencies.

“Not all banks will lend to insurance agencies because of their lack of fixed assets,” explains Jim Jones, president of Quivira Capital. “Lenders who do loan to insurance agencies typically have strict business and personal underwriting and loan size requirements. So getting growth capital is complicated. Lenders often require agency principals to offer personal guarantees. They may also demand personal assets and real estate as collateral. And that’s a risk you should weigh carefully.”

The majority of agency owners will end up searching for suitable debt financing at some point in their careers, in order to grow or improve their agencies. Taking on debt to grow your agency is definitely a risk. But rational borrowing for strategic growth is well worth that risk. There are many types of loans and lenders – you can borrow from family or friends, a bank, a specialty lender or your credit cards. (For more on this, read our blog on Good vs Bad debt.)

Specialty lenders who work exclusively with insurance agencies know that your book of business, though intangible, has significant value. We're therefore able to use your future commissions on your book of business as collateral and not require a personal guarantee. Such commission-based loans allow an insurance agency owner to borrow based on the value of their agency.

Your retention rate and product lines matter

Your book of business is obviously very valuable to you, as its owner. Its value is also appreciated and can be collateralized by the right lender. The collateral value of your book depends on two important factors: your long-term relationship with clients, and the lines you sell.

An insurance agency can’t grow if it’s losing clients. That’s why client retention rate is an important key in assessing your book as an asset. We’re looking for consistency and continuity in your client base. We know that, when you have solid client relationships, you can focus your energy on building your agency rather fighting to retain business. That growth potential has value in and of itself.

We also look at the breadth and diversity of your client list. The loss of a major client or a category of clients has less impact when your client list is expansive and varied. We can offer the best rates and terms to agencies with a diverse range of clients.

To determine the collateral value of your book, we also review your agency’s range of insurance products and clients. A diverse product portfolio enhances your book’s value more than a narrow offering of just one specialty or niche. 

“We know expanding your client base is critical to your agency's success and profitability,” explains AgileCap lending advisor Kyle Castle. “To expand your offerings and become more competitive, you need growth capital. Finding a lender who understands how agencies grow and how to collateralize your commissions will make borrowing much easier. And the best way to make your book more valuable to a potential lender is to demonstrate that you've got a broad range of product offerings and youcast a wide net for referrals.”

Finding the Right Loan and the Right Lender

Borrowing for growth will put your agency in a stronger financial position, and there are many financing solutions available. Specialty lenders are experts at providing loans for insurance agencies. We’re not tied to the collateral requirements of banks and SBA lenders. We understand the inner workings of the insurance industry. And we’re able to value assets in ways that traditional lenders just can’t.

“When we found our first insurance agency to acquire, we were combining two complex books of business,” recounts Rebecca Barens, owner of Willow Insurance Group. “We didn’t expect finding an interested lender to be so hard. Our M&A broker introduced us to AgileCap, and they were exceptional. They funded our loan quickly and efficiently, using our newly combined book as collateral. Within a year, we used them to finance another acquisition. AgileCap has been very adaptable and responsive to our agency’s specific needs.”

Specialty lenders often finance acquisitions with “interest-only plus amortization loans.” A defined interest-only period (of months to years) at the start of your loan term reduces the amount of your loan payment initially and provides some breathing room. During this time, your agency can accomplish preset goals and grow revenues. For example, during an 18-month interest-only period, you can actively focus on increasing sales, hiring and training. These new sales produce commission income that exceeds your interest expense and amortization payments. So you can easily pay off your loan. Many agencies then actively look for new acquisitions to continue growth (learn more about Organic vs. Acquisition Growth).

Financing designed with your agency's growth in mind

We understand the nature and principals of agency growth and we know how to collateralize commissions. Our Lending Advisors think creatively and design financing solutions to meet your agency’s lending needs and timing. We can customize your loan using multiple draws/pay downs, interest-only periods, interest rate steps, and rolling underwriting.

If you’re ready to talk about financing your growth plans, schedule a complimentary 30 minute consult with one of our Lending Advisors today, using the form below or the “Schedule a Consult” button at the top of each page.