What Does It Take to Qualify for an Agency Loan?

George Nash opened his independent insurance agency in 1986. Over the years, he has hired several producers and support staff, and grown the independent firm to provide a very comfortable annual income for his household. As the agency approaches its 30th anniversary and George nears retirement age, he is making early plans to sell the business. He expects that his buyer may have to finance the transaction and wonders how to select a buyer that will qualify for a loan.

Carol Smythe purchased an existing general lines agency in 2005 and quickly grew the business through savvy marketing to double annual revenues. Now, she wants to expand into nearby markets and is considering acquiring another, smaller local agency. She knows that she will need to finance the acquisition and isn’t sure what criteria lenders will use to qualify her for a business loan.

George and Carol’s questions are not uncommon, as insurance agency owners frequently need a business loan for various purposes, including:

• Acquisitions
• Perpetuation
• Recapitalization

Whether agency owners want to hire new producers, launch a marketing campaign, buy a book of business or transfer the agency to a family member, they generally will need to arrange an agency loan to fulfill their plans. Since most independent insurance agencies have limited access to capital from traditional banks, working with a Financial Partner who has agreements with multiple specialty underwriters is a smart solution. Rather than asking the agency owner to put up personal assets or real property as collateral, these specialty financial underwriters can put together loan packages based on three primary criteria:

Revenues and Positive Net Cash Flow – The amount and terms of the loan are heavily based on the agency’s ability to consistently produce revenue and positive net cash flow from that revenue. The revenue stream is considered the primary collateral for specialty insurance loans, and the calculated net income from that revenue is what underwriters look for in determining the ability of the agency to cover the cost of the loan.

Valuation – In the same way that a home buyer will commission an appraisal to determine the value of the home they want to purchase, lenders use third-party experts to determine the value of an agency before granting a loan. Because the valuation will affect the amount and terms of the loan, agency owners needing capital should expect the underwriter to order a valuation from an expert who understands the unique aspects of the insurance industry, such as carrier contracts and contingency bonuses.

Borrower Creditworthiness – Since agency loans typically have no hard assets to back up the loan, insurance specialty underwriters evaluate the borrower as well as the insurance business. Underwriters work to understand the financial history of the agency owner (or partners) and to project the future revenue and earning potential of the enterprise under the borrower’s leadership.

Working with a specialized financial intermediary rather than directly with a single product lender can improve the chances of obtaining financing for an agency’s needs and ensure the best rates. The Springtree Group (STG) has long-standing formal relationships with more than two dozen niche loan underwriters that offer financing programs specifically tailored to the needs of independent agencies. These niche lenders are focused on providing financing for insurance industry clients with a broad mix of loan packages, maximizing the probability that we can find the right loan for buyers and sellers, and for agencies needing capital to grow their business or retire debt.

With an expansive product portfolio, we can create custom-built loan packages for insurance agents and brokers. Most programs are based on cash flow, rather than personal assets, and require very little additional buyer cash to complete the deal. In addition, STG can offer borrowers additional ideas for business growth and tools to make their firm successful and profitable.

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.