There are many benefits to SBA loans, and lots of insurance agencies are finding that this is a particularly good time to apply for them. Unfortunately there are some downsides to an SBA loan that borrowers can encounter. One downside we’re hearing about lately is the length of time that SBA loans can take to be funded.
There are at least two ways to grow your agency business (either or both may require some amount of insurance agency financing). You can expand organically over time, adding to your bottom line client-by-client, or you can grow more quickly through acquisition.
Acquiring the right agency or book of business can broaden the size, scope and capabilities of your current agency. It can also skyrocket your revenues and profits.
If your agency is considering an acquisition, you may need to look into insurance agency financing for all or part of the purchase. Here are six things to consider in order to be best prepared to apply for financing.
1. Examine Your Business Structure
How is your business set up? Your lender will need to know if you are an LLC or a corporation. Some lenders will not loan to a sole proprietor or individual. Make sure you are clear on all the details of your agency:
- What is the legal name?
- Who are the named owners and what are each of your percentages of ownership?
- Who needs to sign on a loan?
- Is your licensing up to date?
You or your legal and accounting team should consider reviewing and updating your operating agreement, bylaws and articles of incorporation. Review your ownership and list only those people still affiliated with your agency in your operating agreement. Make sure the agreements spell out each partner’s roles and responsibilities. Your lawyer and accountant may make additional recommendations.
Examine your insurance licensing and state/local business licensing. If you are not in good standing, renew all relevant licenses. Be aware that an expired license can slow down your loan application process.
2. Have Your Finances In Order
Your lender needs to have a clear understanding of your financial picture. Your books should demonstrate a profitable and well-run company. Delivering unclear and incomplete documentation will raise an automatic red flag to lenders, possibly suggesting that your agency is disorganized.
Lenders are looking for borrowers who can clearly demonstrate growth, client retention and timely payment of obligations. Most lenders will likely ask for two years of tax returns, one year of bank statements, carrier reports and current P&L statements.
Do these documents all align and tell the same story of a profitable agency?
Unconventional accounting practices can hurt your ability to secure financing. Be prepared with good explanations and have your accounting firm corroborate your tax strategy. Offer proof if you’ve filed for extensions on taxes, and be prepared to explain why. Some lenders can be flexible about a bankruptcy if you can tie it to a justifiable circumstance (e.g. divorce, illness, weather-related catastrophe).
3. Present a Unified Front
Make sure all owners, partners and key producers understand and support your acquisition plan. Lenders may ask owners with 20% or greater ownership to present personal information and financials. Important: consult your company bylaws/operating agreement as these documents dictate who will approve and sign your loan.
Key staff members in your agency should be informed (to the extent you determine is appropriate) of your plan to acquire another agency or book. Will you need to hire additional staff once you've grown your agency? How could this impact your current team?
4. Protect Your Credit Score/Consolidate Debt
The best thing you can do to lower your financing costs is to protect your credit score. Before hunting for an acquisition, pull your credit. There are plenty of free resources that allow you to see your personal credit score (e.g., creditscorecard.com).
If your FICO is in the 600s (or lower), make sure you have a good explanation for why and be prepared to pay more for your loan. As a general rule of thumb, lenders generally offer a better rate to borrowers with a FICO of 720 or higher.
To improve your FICO:
- Make sure your credit cards aren’t over-leveraged.
- Avoid opening any new credit accounts.
- Prioritize paying your agency bills on time.
Your partners should look into their credit scores as well. Do they have pending transactions that will affect their credit, for example a home purchase? Such personal transactions can impact your ability to secure funding.
Many lenders will require first lien position – make it easy. Know who your debtors are and pay off as many statements as possible in advance.
5. Know Your Existing Book and the New Acquisition
What are your current annual premiums and commissions? Who are your carriers and what percentage of your business is with each one? What types of policies do you sell? Lenders are looking for assignable and consistent growth, retention and payouts.
Understand your agency’s carrier contracts and your status within that structure. Your master agreements will tell you if you can use your book and commissions as lending collateral. Reach out to your home office or carriers if you have questions on any of the terms of the contract.
When searching for your new acquisition, decide what you want in scope, size and geographic location. What kinds of acquisitions will fit easily and naturally into your existing business? How much of a revenue stream are you looking to acquire?
Due diligence on the new book is mandatory. You should investigate retention rates, types of policies, and carrier relationships. Will the owner help you to transition with key clients?
Many agency owners are extremely busy running their business and have little time to focus on acquisitions. If this is your challenge, many professional resources such as merger and acquisition or insurance industry consultants can help you with the entire process.
6. Determine How Much You Need (and who can help)
Will your cash flow support your loan? Most lenders will only loan on a percentage of the agency or book value. How will you make up the difference? Is the seller able to finance the gap? Do you have sufficient cash on hand to cover the balance?
Get prequalified. A good lender will help you on the front-end by letting you know your options. They can even provide a letter of intent or prequalification to strengthen your position if there are multiple offers on the table.
Know the types of loans and lenders available to you. SBA loans offer the best rates, but can require a great deal of time and documentation to process. Credit cards may seem like an easy answer when you're looking for funds but you can accrue interest charges of 15% or higher, making them a very expensive option. On the extreme end, you'll probably find that cash advance lenders are happy to help, but you could face rates 50% or more. Specialty lenders who focus only on the insurance industry, like AgileCap, can offer you insight, experience, and funding that is faster than banks or SBA lenders, yet less costly than credit cards. For an overview of your lending options, refer to our "Lending Landscape" chart.
When you are ready to move forward with financing:
1. Check out our Insurance Agency Acquisition Financing Checklist. It will help you organize your business and financial information as you prepare to apply for funding.
2. There are multiple ways to book a free, no-pressure 30-minute consult with one of our Lending Advisors...click the "Schedule a Consult" button at the top of the page, fill out the form below, or call 855.514.1189. Spend 30 minutes with a Lending Advisor who will focus on learning about your agency and tailoring a loan to your business goals.