As more Baby Boomers near retirement age, an estimated 50% to 75% of U.S. insurance agencies will transition ownership within the next ten years. However, both buyers and sellers are finding themselves in a difficult situation, because most traditional lenders are hesitant to finance insurance agency transfer deals. This is because banks like to make loans based on hard assets—something most insurance agencies don’t have.
Insurance agency assets aren’t physical, and their loans need to be secured by cash flow based on the expectation of a continued stream of new commissions and renewals. Because banks have been slow to embrace loan underwriting based on this criteria, a niche financing industry has emerged that specializes in providing insurance agencies with the capital and liquidity for common agency transfer or business expansion needs.
How Agency Lenders Differ from Traditional Lenders
Traditional lenders, like most banks, generally make loan decisions based on personal and/or business credit scores and place a strong emphasis on an individual and company’s balance sheets, which include the equity value of tangible hard assets. Agency loan underwriters take a more holistic approach to credit and consider a combination of both personal and business scores as well as intangible assets.
An applicant’s personal credit score doesn’t have to be perfect, and some lenders will provide financing to individuals with FICO scores in the 500s, as long as the agency has the cash flow to cover debt service. The emphasis on free cash flow also allows niche lenders to make much larger loans than a traditional bank.
Surprisingly, loans made with most insurance niche underwriters tend to have a very low default rate. This allows these lenders to provide reasonable terms on loans to insurance agencies. An agency owner with a healthy free cash flow and strong personal credit can get single digit interest rates on loans ranging from five to 10+ years, depending on use of the loan proceeds.
Most insurance niche underwriters have standard arrangements that make repayment of the loan easy for agency owners. The treaty STG has negotiated with our underwriting teams include no direct banking, packaging or origination fees in the financing quote. There are also no upfront fees, no prepayment fees, no call premiums, no ongoing service fees, no financial performance covenants, no interception of commissions and no holdbacks. And in most cases STG will also perform a complete title search (UCC filing), credit check, financial and cash flow analysis (both historical as well as Pro Forma) as part of this process.
Springtree Group provides the strongest array of agency M&A and lending tools available in the U.S., and we have numerous long-standing relationships with the strongest niche underwriters that provide financing programs well suited to the needs of insurance agencies. These underwriters are focused on providing financing for STG insurance industry clients with a broad mix of loan packages, maximizing the probability that we can find the right loan for borrowers needing capital to grow their business, restructure debt, perpetuate the business or clean up the balance sheet. In addition, our expansive product portfolio lets us create custom-built loan packages for agents and brokers, with most programs based on cash flow rather than personal assets and requiring very little additional buyer cash to complete the deal.
Let us help you find the right the loan for your company, with favorable terms that work for your business. Contact Springtree Group today at (972) 395-8811, or use our online form to request more information.