When you need an insurance agency business loan, finding the right lender is important. Ask these questions to help determine if a particular lender is right for your agency, its financial situation, and your business goals.
There are at least two ways to grow your business. You can expand organically over time, adding to your bottom line client-by-client. Or you can grow rapidly through acquisition.
Acquiring the right book of business or agency can skyrocket revenues and profits. It can also broaden the size, scope and capabilities of your current firm.
If your agency is considering an acquisition, you may need to finance all or part of it. Here are six things to consider as you prepare to apply for financing.
Examine Your Business Structure
How is your business set up? Your lender will need to know if you are an LLC or a corporation. Many lenders will not loan to a sole proprietor or individual. Make sure you are clear on all the details of your company:
- What is its legal name?
- Who are the current owners and what are their percentages of ownership?
- Who needs to sign on a loan?
- Is your licensing up to date?
Your legal and accounting team can review and update your operating agreement, bylaws and articles of incorporation. Review your ownership and list only those people still affiliated with your firm 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. An expired license can slow down your loan application process.
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, suggesting that your company is disorganized.
Lenders are looking for borrowers who can clearly demonstrate growth, client retention and timely payment of obligations. They 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).
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 should be informed of your plan to acquire another agency or book. Will you need to hire additional staff? How does this impact your current team?
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. 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.
- Decline to open new credit accounts.
- Avoid late payments on bills.
Your partners should look into their credit scores. Do they have pending transactions that will affect their credit, for example a home purchase? Such personal transactions may 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.
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.
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. Businesses often enjoy the effortlessness of credit cards, but can accrue interest charges of 15% or higher. On the extreme end, cash advance lenders are happy to help, but you could face rates 50% or more.
When you are ready to move forward with financing:
2. Fill out the form below or call AgileCap at 855.514.1189 for a free 30-minute consult. A Lending Advisor will focus on learning your needs, understanding your goals, finding the right fit in a loan, and customizing it for you.