Very few of us can remember living through a pandemic, much less doing business through one. No one can really predict the impact the coronavirus will have on our economy, but broad indicators do seem to point to an approaching economic downturn.
While the insurance industry will certainly be impacted by such a downturn, we’re seeing indications that the impact may be “muted” to some extent, due to the fact that insurance is a required or mandated purchase for most people or businesses. It’s worth noting that it also appears that the degree of economic impact felt by an agency will vary according to the insurance products that agency carries. Overall, though, it looks like agency owners may see revenues and resulting cash flow that are a bit more predictable than other industries in the coming downturn. And that’s important, since reliable cash flow is critical to business success…in any economy.
Muted impacts or not, during an economic downturn you may find that your agency needs to fall back on savings or you may need to seek out loans to survive and navigate an uncertain economy.
Thinking about insurance agency lending during an economic downturn
As the economic situation is unfolding, you’re wise to focus on limiting your non-essential business expenses while also closely monitoring your financial position. In order to be ready to deal with any future financial needs or challenges, you may be considering applying for federal support (PPP or EIDL) or borrowing in order to have cash on hand. Of course, taking on any debt involves a heightened risk of tying your agency to repayment responsibilities at a time when so much of the future is unknown.
With all of that said, though, we have to acknowledge that for some agencies this could actually be a good time to explore your borrowing options and even to look for business opportunities. Every agency’s situation is different but, just like investing in solid companies when the stock market is down, looking for growth opportunities in an economic downturn could prove beneficial for some agencies in the long run.
We understand that finding financing in times of financial uncertainty can seem daunting. You may wonder if it’s prudent to take on debt that could impact your future cash flow. Or you may be worried about securing a loan when money is tight. As we have said, every agency is different and you must evaluate your agency’s situation carefully.
If borrowing seems like a prudent way forward for your agency then this advice from our underwriter, Trevor Plett, may be of use: “It’s important to understand what lenders look for in a challenging economy. The better you understand what lenders want, the better your chances of qualifying for the financing you need. This is true whether you’re looking to qualify for a new loan or restructuring an existing one. Lenders want to see that you grasp the responsibility you’re taking on, and can manage debt and deal with the unknown.”
Understanding how lenders make decisions can help you see ways to improve your odds of qualifying for a loan. Let’s look at the framework that insurance agency lenders use when considering a loan application.
The Four C’s of Credit in normal economic times
Just like any business owner, lenders need to mitigate risk. To do this, we use a framework we call the “Four C’s of Credit”. The framework helps us consider how confident we can be in a particular business and its owner’s ability to manage debt to support it. This is how we think about each of the C’s:
Lenders look closely at your past debt history. Do you pay your bills on time? Have you diligently repaid past loans? Do you live within your means, spending less than you earn? Do you save? And where does debt repayment fall as a priority when it come to your expenses?
2. Cash Flow/Capacity
Does your business have the cash flow to repay a new loan once you’ve paid all of your existing expenses? Is your agency’s income consistently greater than its expenses and debts? If more money is coming in than going out, you have positive cash flow, which is good. If more money is going out than coming in, you’ll need to increase your income or reduce your expenses to qualify for a loan.
What shape is your agency in? How long have you been in business? What are your relationships like with your customers, carriers and business associates? How many employees do you have and how long have they worked for you? When your income increases, do your operating expenses increase at the same rate? Do you have savings or rainy day fund?
What is the value of your agency – how much could you sell it for? What do you own and what do you earn that can serve as collateral for a loan? What are your annual commissions and can you prove consistency or growth year to year? Do you have physical assets like business or personal property? Do you have sufficient personal savings, assets, or net worth to back a business loan? Do you have a reliable source of income from a spouse that you can draw from, or is your agency your sole source of income? Do you have personal savings to fall back on?
During economic downturns…
Your agency revenues may decrease to some extent, as the result of lost policies or even customers. Insurance agency lenders want to see responsible revenue management, which means cutting expenses to match any income declines. Cash flow/capacity becomes a priority for lenders who are assessing an agency’s credit risk in a downturn.
1. Cash Flow/Capacity
Cash flow is the most obvious and immediate indicator of the health of an agency and the responsibility that the agency owner takes in running his/her business. Lenders are looking for borrowers who are most likely to make timely payments on a loan. In a cash flow financing scenario, your loan is based on anticipated future revenues minus expenses. Lenders want to see that you’re actively managing every dollar you spend. If your revenue declines by 20 percent, lenders want to see your expenses do the same. We want to see that you can meet all your obligations and still repay business and personal debt.
Lenders value responsible saving and living within your means personally and as an agency owner – especially in difficult economic times.
Think of your agency as a car your lender is using as collateral. The car doesn’t have to be in mint condition – some rust and dings are okay. If the engine runs and the car functions well (in agency terms, if your income is greater than your expenses and your client and carrier relationships are strong), then you’re a good candidate for a loan. A lender who understands the insurance industry knows how to evaluate important factors and determine the overall vitality of your business.
In a tough economy, the value of all business and personal assets can take a hit, across the board. While a valuable consideration, this factor is among the least important assessment tools to a lender during a downturn.
A tool to help you visualize your agency’s financial future
In this evolving economic situation, it can be especially helpful to have some insight into your agency’s future financial position. No one has a crystal ball, and there’s a great deal that’s unknown on the horizon. But our Cash Flow Projection Worksheet can help give you some insight into your expenses and revenues in the coming months so that you can anticipate any difficult spots where your cash flow dips into the negative. If you’re considering taking on debt, you can include potential debt repayment amounts in the spreadsheet so you’ll be able to see if you can consistently meet your internal obligations and your external debt repayments and still have positive cash flow, or where you’ll need to consider trimming expenses.
At AgileCap, we have the experience, capacity, and capability to help as your agency navigates the future
We’re prepared to work one-on-one with you to navigate these difficult times. We provided loans through the financial crisis of 2008 and we’ll work through this crisis with you. We are financially strong and have money to lend. Our team is ready to help.
Though we do not offer federal government or SBA loans, if those loans are right for your agency, we can refer you to trusted partners who offer them. If you find that you do not qualify for those loans, though, borrowing with a specialty lender like AgileCap could be a strong option for you.