The concept of insurance has been part of human trading since the 2nd millennium when the Babylonians came up with an ingenious idea that was recorded in the infamous Code of Hammurabi that is more famous for its lex talionis, otherwise rephrased as “an eye for an eye, a tooth for a tooth” and used by Mediterranean sailing merchants before being adopted by Chinese merchants in the 3rd millennium. The Greeks and Romans also practiced aspects of insurance with the development of benevolent societies, a concept that was then replicated in Guilds of the middle Ages and friendly societies in England in the 17th century. Genoa then came up with the first ever insurance contract and a hop, step and jump away into the enlightenment era in Europe, special varieties were developed and insurance as we know it was developed. Over the years, the insurance industry has grown but buying insurance agency loans is still a hassle with a lot of red tape especially when seeking funding from traditional financial institutions.
Today there are more than 400,000 insurance agencies in the US alone and of these it is estimated that over half will be sold in 5-7 years a fact that can be attributed to the risk that agencies shoulder as well as the bureaucracy that they have to face to get much needed financial assistance and many of those are agencies for sale. It is not all gloom and doom however as even this statistic represents a growth opportunity for ambitious agencies looking to grow through acquisitions as well as organically. An open secret in the industry is that a well-timed expansion can increase an agency’s revenue exponentially and a smart acquisition can help propel the career of a sales producer. The difficulty in doing so however is in securing an insurance agency loan and understanding the process involved or even lending products available especially for those just getting into the game.
Before trying to secure an insurance agency loan it is important to remember a few key details. The first is the credit score which is the bane of existence of anyone trying to get a loan, insurance agency or not. Low credit scores will severely decrease an agency’s chances of loan approval. The only way to deal with this is to build up the credit which takes time, paying off any current debts and ensuring that all accounts operated by the agency are current and have been in use for a minimum of six months. A detail closely related is tax information. It is important to ensure that all taxes are filed in time including those of the agency that one may be interested in for those looking to buy out another agency ensuring there are no extensions. The tax information is necessary in securing a loan and having current information helps in simplifying the process. Additionally as financial institutions will generally require collateral or a down payment especially for those with a less than desirable FICO score; it may be prudent to build a savings account that can cover the down payment. The final steps including doing due diligence and coming up with an impressive plan because this is just smart business to find professionals in the insurance agency loan and acquisition business (Springtree Group) and of course as it will help in growing your business once the loan is approved.
The final piece of relevant advice is where exactly to get insurance agency loans. Although getting funding from banks is a lot harder than other avenues, there are select commercial banks that offer loans but the downside is that the financial terms that come with them are likely to make cash flow tighter. The tough conditions however are sometimes offset by cheaper interest rates. The second avenue available for insurance agency loans is through commission-based loans. One of the largest lenders that specialize in this is Oak Street Funding which was voted as one of the best financial services companies by Insurance Business America Magazine. Its lending model allows agencies to borrow more capital than they would usually be able to if the loan amount is supported by the make-up of the books. Additionally, agencies get better terms the more they transact with Oak Street and in some cases can even have an earn-out included in the terms if the agency’s cash flow can support it. Other ways to get insurance agency loans include private equity capital and SBA loans. SBA loans have a $5 million cap but will usually not lend more than $1.2 million for acquisition purposes but have other advantages such as competitive interest rates and repayment periods. However as with all financial decisions, the most important thing is to carry out adequate research and find the best fit.