There is little argument that if you can double your agency’s premium book, the inherent renewal economics will more than double income.
The first question is: how do you grow to double your premium book? Keeping in mind that the growing comes before the doubling, you have to figure out how to pay for that growth.
For instance, if you want to buy a lead generation facility and back-office software for $25,000, you have to ask, “Where does that money come from?”
On a larger scale, perhaps there’s a book of business that fits well with your current products, and you can pick it up for $275,000. More dollars, same problem. If those funds aren’t in your bank account, they must come from either debt or equity.
We all know what debt is—or do we? And equity; what’s to know? You go to the stock market and buy shares—that’s equity. The fact is, there are different kinds of debt and different kinds of equity.
If you are an agency that wants to grow your business, then it’s well worth your while to understand both.
This discussion focuses on debt financing for insurance agencies. A follow-up discussion will explore equity.
- Peter J. Friedman
Borrowing is a risk, and there is no doubt that rational borrowing for successful growth is well worth that risk. However, borrowing from family, from a bank, or the secondary money market are very different.
For one thing, in addition to costing less in interest, it is very likely that a family lender will be much more forgiving than, say, a bank, not to mention the secondary money lenders. In fact, the one thing these commercial lenders will have in common, and quite apart from family and friends, will be a requirement for collateral in some form. In almost all cases, it will be necessary to back up your loan with your house, your car, your business equipment.
These are hard assets, which is why such loans are referred to as ‘hard money’ loans. That is, taking on a hard money loan means that you are betting your assets on your ability to repay that loan according to its terms.
The loan we all know about is the amortization, known in more familiar terms as your home mortgage. Here, you agree to pay back the sum of money, say $225,000, in a fixed number of payments, each payment in the same amount, at a specified interest rate.
For example, if your $225,000 mortgage loan is to be repaid over 15 years at 4%/year interest, you will make a monthly payment of $1,664 per month.
Then there is the balloon note. YYou borrow $225,000, make no payments for two years, and then the entire balance plus interest is due at once. Because of the deferral, the interest rate is typically higher—say 10.5%. After two years, you’d owe $228,938.
A third loan type is a compromise between these two. It requires you to pay interest only for some period, and then amortizes the loan balance over a second period. So $225,000 over a 2-year interest only period followed by a 3-year amortization would look as follows, assuming a 12% annual interest rate:
As you might expect there are innumerable variations on these three themes.
If you are on really good terms with your bank, have stellar credit and little or no credit card debt, you may be able to come by a signature loan. This means the lender is not specifying what hard assets will ensure the loan’s repayment. Instead, you are personally responsible for it. If things go bad, you are on the hook, and the lender will most likely come after you. That circumstance is just as ominous as it sounds.
If a signature loan is not in the cards, then you have to look to your hard assets.Since your home probably has a mortgage, that is not a good candidate for a hard money loan.
How about the building that houses your agency? Only if you own it, of course, and if it is not already encumbered. Which leaves your business equipment. Is there enough there to back the $225,000 note of the example, especially after the note and the equipment have aged a few years?
The fact is, most small businesses do not have the hard assets necessary for a business loan of even modest proportions. So where does that leave you? The answer has to be your soft assets, that is, your receivables.
A lender making a loan against future income is betting that income will materialize. For example, if you invoice for a service, some funders will buy that invoice at a discount or lend against it.
Similarly, if you have a book of policies in force, certain lenders can evaluate that book as viable collateral. However, few lenders specialize in this type of financing—and most still require a personal guarantee “just in case.”
In other words, even soft-asset loans are often backed by hard assets.
Running a business is inherently risky. Borrowing adds another layer of risk—but also the potential for reward. If the value generated by borrowing exceeds the cost of the loan, it’s a win. If not, the costs can outlive the benefits.
That’s why choosing wisely matters. Here’s a quick ranking from least to most risky:
Taking on debt to grow your agency is definitely a risk. The majority of agency owners will have to look to the secondary money market for financing. Generally speaking, that will call for collateral—so look for a lender who will consider your book of business as collateral, not just hard assets or personal guarantees.
At AgileCap, we specialize in customized insurance agency loans that use your book of business as collateral, helping you access funding without risking your home or personal assets.
If you’re ready to explore flexible financing built for insurance agencies, schedule a complimentary consultation with one of our Lending Advisors today.
Or fill out this form and we’ll be in touch with you within 24 hours. No risk, no obligation.
Call (855) 514-1189
At AgileCap, we understand that timing is crucial, especially when year-end goals and tax implications are at stake. Last December, we partnered with an independent insurance agency to provide a $300,000 book acquisition loan in less than 30 days.
As the year draws to a close, owners of small insurance agencies face a pivotal moment—not just to wrap up operations, but to set the tone for the year ahead.
Acquiring an insurance agency is one of the fastest ways to grow your business. Whether you're expanding into new markets or increasing your book of business, knowing where to look is half the battle. Here are five proven strategies to help you find the right agency for sale.
