Insurance agency lending is sometimes misunderstood.
We've heard from some of our clients, once they've started working with us, that they had previously misunderstood a number of things about agency lending and lenders.
Unfortunately, such misunderstandings can become industry-held myths, and those myths can stop agency owners from contacting a lender or looking for funds when their agency could really use a capital infusion in order to grow.
Hopefully this list of dispelled myths will help clarify agency financing so that you'll be better prepared to seek funding for your agency if and when you need it.
Insurance agency loans take a long time to secure.
No matter where you go in search of an agency loan, you'll find that all lenders have four basic steps to their lending process: Application, Underwriting/Approval, Closing, and Funding/Servicing.
The length of time for each step varies from lender to lender, and it's impacted by the size of your loan, its purpose, and the size and experience level of the lender.
Traditional lenders like banks and SBA lenders tend to take longer to fund because they have multiple layers of administration and approval that a borrower must go through, and their paperwork requirements tend to be more extensive.
Private and specialty lenders generally have faster turnaround times because their organization is smaller, simpler, and more nimble, with fewer administrative layers to go through. As a result, they can issue term sheets quickly, letting you know how much you’re eligible to borrow in about 24 hours. And, once you’ve provided all the necessary paperwork, they have the ability to fund in 7-10 business days.
You and your agency must have perfect credit in order to get a loan.
Each lender determines the level of creditworthiness they’re willing to accept in a borrower. Private and specialty lenders consider an agency’s financial situation, business performance, and cashflow in addition to credit history and credit score, so they’re able to be more flexible in determining loan eligibility and loan terms than some traditional lenders.
You can only finance LARGE amounts of money
(or Myth #3b: Your agency would only be eligible to borrow a SMALL amount of money).
This is a simple myth to dispel…don’t be afraid to ask a lender for the amount of money you need, however large or small it is. The lender should work with you to design an appropriate loan, based on the amount you need to support your business goals and how much your agency can afford to repay each month.
This can only be determined in conversation with an experienced lender.
Interest rates are the most important factor to pay attention to when you borrow money for your agency.
Even though interest rates have the most direct impact on how much you’ll pay for a loan, it’s actually the interplay of multiple loan terms that determines the cost of your loan. Therefore, be sure to pay attention to fees, repayment provisions, penalties and contractual obligations when you’re discussing the structure of your loan with a lender.
You have to have physical assets to use as collateral in order to get an agency loan.
Traditional lenders do require fixed assets to secure their loans. But specialty lenders understand that, while agencies may not have tangible assets, there is value in their book of business that can be collateralized.
Taking into consideration an agency’s client list, retention rate, and range of product lines, such lenders can create loans using future commissions as collateral. This also reduces the risk to an agency owner’s personal assets.
Debt is bad for insurance agencies.
Many agencies rely on borrowed funds at various stages of their business’ growth. Debt obviously has to be handled with care. You certainly don’t want to rely too heavily on borrowed funds, or risk leveraging retirement savings or personal credit cards, nor do you want to borrow to cover day-to-day operations or to make up for a cash-flow deficit.
A responsible lender will get to know your agency’s financial situation and decide how much capital your business can reasonably afford to take on. Managed well, debt can help you achieve healthy business growth.
Taking out a loan means that somehow you’ve failed in your business.
Many successful agency owners find they simply don’t have the necessary personal or investment capital on-hand when a business opportunity arises. A capital injection can be a catalyst for your agency’s acceleration and success, whether that’s through adding new products, hiring new producers, investing in new technology, or acquiring another agency that aligns with your overall business plan. Of course you never want to borrow in order to simply cover your current expenses.
The key to responsible borrowing is leveraging the funds to increase your profits and the overall value of your agency, ultimately putting your business in a stronger financial position.
All business lenders are basically the same.
There’s a full range of lenders out there, each with their own lending requirements, loan terms, areas of expertise, and limitations. Different lenders will be a good fit for your agency at different stages of your business’ growth. Be sure to consider the full range of lenders, including traditional banks, SBA-backed lenders, and specialty lenders any time you consider borrowing.
Assess and compare each lender’s products and capabilities carefully, as you want to choose the lender who will best support your agency and your vision for its growth.
Online lenders can’t be trusted.
Everything is done online these days, including connecting with potential lenders. Of course you have to do your homework and be careful to avoid predatory or dishonest lenders. But there are plenty of legitimate lenders who utilize the internet as an effective tool to connect with borrowers.
It’s worth noting that, while some lenders offer online applications, at AgileCap we’ve found the best way to understand an agency’s financial situation, growth plans, and goals is to have an in-person conversation. We therefore offer online scheduling for 30 minute, no pressure, in-person consultations. We're always available to start a funding conversation, and always happy to answer questions and dispel any myths. Schedule time with us by filling out the form below or clicking the Schedule a Consult button at the top of each page.