It is critical for insurance agency owners to ask the right questions of potential lenders and recognize when the answers raise red flags. (Credit: Shutterstock/ALM archives)
Most insurance agency owners seeking a loan tend to focus on the basics: loan terms, interest rate, timing and closing costs. But choosing the right lending partner requires a broader lens. Borrowing, when used strategically — for example, to fund growth, technology upgrades or succession — can serve as a valuable asset. A well-run agency that relies solely on retained earnings may miss expansion opportunities and fall behind more leveraged competitors.
In fact, the term “leverage” as it applies in finance is often misunderstood. In and of itself, it refers to the use of borrowed money (debt) to increase investment returns, acquire assets or fund business operations. It allows businesses to increase their returns by investing more capital than they have available, but it also carries increased risk. Many business owners may believe that they are prudent not to have any debt on their books. But is that the best strategy?
Consider as an analogy investing for retirement. An agency owner can invest in certificates of deposit and be assured of a positive return if held to maturity. However, in doing so and avoiding the risk of other investments such as stocks and bonds, the owner gives up the opportunity to achieve greater growth of the retirement portfolio. Similarly, an independent agency that sees opportunities but does not seek outside capital is limited in trying to acquire other agencies or implementing more efficient technology to improve the customer experience.
Key questions to ask lenders
Independent insurance agencies operate differently from businesses in other sectors. Banks with a generic, one-size-fits-all approach can frustrate owners and potentially miss important risk factors or growth opportunities. That is why it is critical for agency owners to ask the right questions and recognize when the answers raise red flags.
- What collateral will be required? Will personal guarantees, liens on LLC or S Corp ownership, C Corp stock, or assignments of life insurance policies be expected?
- How will financial statements be handled? Must they be CPA-prepared? How often will they be reviewed?
- Does the bank understand how to interpret carrier premium reports?
- Does the bank understand how independent agencies operate? Can they speak to cash-flow cycles, contingency income, premium trust accounts, and other operational intricacies?
- Is there flexibility in loan structure? What criteria determine loan terms and repayment schedules? Are these adjusted for industry-specific dynamics?
- How are varying financial positions among co-owners addressed? If one partner has weaker personal finances, how does that impact the bank’s lending criteria?
- Will the bank help interpret loan covenants? Can they explain terms like debt service coverage or trust ratio requirements, and help the agency plan for contingencies?
- Can the bank advise on Small Business Administration (SBA) vs. conventional loans? Do they understand which loan suits the agency’s current situation and future goals?
- What is the bank’s view on succession planning? Will they assess the management team’s ability to sustain operations if a principal exits unexpectedly?
As agency owners or principals evaluate the responses to these questions, they should consider whether the lender truly understands the agency’s business model and whether the owners are comfortable with the lender as a long-term partner. Does the lender have a history of working with agencies like this one? Can the lender provide insight that goes beyond the numbers, the same way the agency does for its own clients?
Before vetting potential lenders, agency owners should pause for introspection and anticipate the kinds of questions a bank’s underwriting team is likely to ask:
- Has the agency demonstrated stable cash flow over several years?
- Are the financial statements well-organized and easy for a third party to evaluate?
- Are there past business disruptions, such as the death of a principal or the discontinuation of a product line, that may need to be explained?
Agency owners should be prepared to clearly articulate why the financing is needed and what results they expect it to generate. Whether the capital is intended for talent acquisition, technology investment or business expansion, agency owners will need to present a complete picture of the agency’s financial health and how the loan supports its broader strategic objectives.
From the outset, agency owners should take a relationship-focused approach rather than viewing the lending process as purely transactional. There are many facets to financing that a bank with deep industry experience can help clarify. Most importantly, the lending officer can assist early in determining whether capital is being sought for the right reasons and whether the timing aligns with the agency’s current reality.
Independent agency owners stress with their insurance customers that having an insurance agent who truly understands their needs is vitally important in helping them with their personal and business risk management. Agency owners should view their bank lender in a similar manner, emphasizing a relationship rather than a transaction.
Keith J. Mangini has more than 25 years of experience in the financial services industry and is vice president, commercial team leader for InsurBanc. He can be reached by sending an email to kmangini@insurbanc.com.
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