Specialized Lender Insights Bolster Agency Loan Requests
At some point in an agency's life, an owner might need to approach a lender to secure working capital, finance perpetuation plans, or even acquire another agency. While corporate lenders provide similar services to all businesses, insurance agencies have unique needs that require special attention.
An agency executive will want to be careful about where they choose to bank, and mindful of what ultimately makes the agency "bankable."
Here is a look at what lenders evaluate when they consider whether or not to loan money to an agency. As the reader will note, there are some criteria that all lenders will likely deem important. There are other criteria that specialized lenders, who truly understand the unique needs of the insurance agency, might factor into their analysis.
Sound Business Plan:
All lenders will favor agencies that have clear plans for their futures. While an elaborate, formal plan isn't necessary, a clearly articulated statement of where the business is going and how it will get there will increase a lender's confidence in the agency.
Strong Financial Track Record:
All lenders will be more likely to loan money to agencies that are financially stable and poised for increased growth. As evidence of that stability, they will likely ask for three years of fiscal year- end statements, three years of tax returns and personal financial statements. Cash flow is what truly makes an agency "bankable." Of course, before lenders approve a loan, they'll evaluate how likely the agency will be to pay it back as scheduled. To judge that likelihood, they rely primarily on the agency's cash flow, which is generally defined as your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
The lender will also consider payment history on existing credit relationships as an indicator of future payment performance.
Lenders who specialize in serving the insurance industry will also view agencies as having very reliable cash flow when compared to many other midsized businesses.
Why? For starters, they understand that, unlike some businesses, insurance agencies don't have to "reinvent" themselves every year, since they deliver a service that individuals and businesses depend on year-in and year-out. Second, they appreciate that good agencies are able to generate predictable cash flow due to high levels of retention.
Principal Compensation:
Banks that truly understand the workings of independent agencies take into account compensation to the agency's principals.
Agencies are often organized as Subchapter S corporations or a Limited Liability Corporation partnership, which is set up for tax advantages where profits are taxed at the shareholder level. A portion of that compensation can be available for debt service calculations.
Collateral:
In general, lenders view collateral as the second most important source of loan repayment, so they all tend to factor it into their loan decisions. But not all lenders define "collateral" the same way.
Traditional banks typically require hard collateral or "tangible" assets to justify business loans. The problem is most insurance agencies rarely have significant tangible assets. So when a traditional bank reviews an agency's three years worth of financial statements, the lender may not see many business assets of tangible value.
In turn, the lender may require the agency owner to encumber their home or other personal collateral.
But specialized lenders, who truly understand the needs of insurance agencies, will define "collateral" more broadly. They look beyond an agency's tangible assets to see its intangible yet still very real value. They will take into account the history of the agency, the relative stability of its cash flow, levels of retention and the ongoing potential of its book of business.
Agency Valuation:
Some lenders have difficulty assessing the real value of an independent agency, but a specialized lender would be better able to assess the full potential represented by an agency's book of business.
Therefore, an agency owner should look for a lender who would consider the agency's business mix, cash flow and operational efficiencies in judging how likely the agency would generate consistent commissions from its existing client base.
Diversified Business Mix:
An agency's mix of business is often just as important as its volume of business. So the more diverse the book across agency clients, business lines and insurance carriers the more favorably specialized lenders would likely view that book.
Lenders look for agencies that are not overly dependent on one carrier or a small group of clients.
o Efficient Operations:
Lenders are eager to loan resources to those agents who prove to be good stewards of those resources. Loan officers look to partner with well-run, efficient agencies that have demonstrated their ability to control expenses while investing wisely in time-saving technology, staff development and brand building.
Not only do independent agency principals need to be savvy about what lenders expect from them, they need to be clear about what they can and should expect from a lender. The better the lender understands the nuances of the independent agency, the more likely they will be to serve the agency's needs.
Agency entrepreneurs should look for lenders who can be fair and disciplined in their analysis and yet flexible and creative in their solutions.
An agency's relationship with a lender should not be incidental to the business it should be integral to it. The advice and guidance of a qualified consultant or lender can be essential to identifying opportunities and avoiding costly errors.
The lender who provides an agency with the banking products to help the agency better optimize the agency's operational efficiencies and growth opportunities also enables the agency to focus on its customer.
Michael W. Herlihy is president and chief executive officer of InsurBanc, a federal thrift institution based in Farmington, Conn., owned by the Independent Insurance Agents & Brokers of America. Additional information is available at www.insurbanc.com or by e-mail at mherlihy@insurbanc.com.
Reproduced from National Underwriter Edition, September 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.