Yes, maybe and no. While these responses might sound like loan decisions you might expect to hear from a lender, they represent my response to the often-asked question of where to seek financing for loans to facilitate an agency acquisition or perpetuation.
I will start inversely with the “no” response. Avoid the temptation of obtaining a loan directly from an insurance carrier you represent. While their offer of financing may be appealing due to a favorable interest rate and long repayment term, this option is fraught with both ethical and business issues. Interestingly, I have observed a resurgence of carriers offering such financing. All cases are similar — the carrier is more than willing to provide financing to your agency provided the level of business you currently produce with them is maintained.
There is an obvious problem here: As an independent agent, you are looking out for the best interest of your client and providing the best service you can give them along with choice of carriers. This can compromise your ability to truly be independent. It is a question best left to ethics scholars, but looks untrustworthy to me.
Further, there is no assurance that the particular carrier will have the same products, pricing and risk appetite to best serve your clients through the repayment of the loan, which may run over several years.
From a business perspective, you will be giving up your most valuable asset — ownership of the client relationship as security for the loan — to the carrier. You also close out any opportunities you may have to sell or merge your business because that same carrier may not provide consent unless even higher levels of production are promised. You may be restricted from rolling a book to a carrier that may provide better coverage and rate for your clients. You may give up opportunities for contingencies.
At the very least, keep in mind that the carrier will be taking the loan payment directly out of your direct bill commission payments, causing a nightmare for any of you who like to reconcile these receipts.
For the most part, the recent financing offerings have been from the carriers that are feeling less certain about their ability to compete for your client’s business and prefer to compete unfairly, placing a thumb on the scale to protect turf.
The better carriers that are stronger and more focused on the value and importance of the independent distribution channel have not been actively providing direct financing. However, they are willing to provide advice and counsel for acquisitions and perpetuations by referring you to specialty insurance lenders and reputable consultants.
Small Business Administration (SBA)
The “maybe” response is for financing guaranteed by the Small Business Administration.
The SBA plays a valuable role in expanding access to finance for businesses. Their charge is to help make credit available when a bank is uncomfortable about an aspect of the loan, often the collateral position.
For your local community bank, this likely means that the banker does not feel that your years of hard work have generated something of lendable value and so needs the guarantee of the SBA to make the loan. While SBA financing is generally longer term (up to 10 years), the rules attached to the program are quite rigid and can’t easily accommodate incomplete ownership transitions, rendering them not helpful for many perpetuations.
Also, the longer term and rules potentially make it difficult to build equity should another opportunity come along or if you need to make a change in the loan such as the release of a retiring owner. Anyone can afford a Lexus if they can get 10-year financing — but hope you don’t need to sell it in two years because you will be upside down.
Another thing to consider is the provider of the SBA loan. This financing program has been a great source of income to lenders because of the opportunity to sell the guaranteed loan to investors. As a result, these lenders may structure the loan with a particularly high variable rate to maximize their profit on sale.
While the prospect of a long term may have appeal and the SBA may make a deal work that otherwise might not be feasible, I suggest you seek a lender that utilizes the SBA program as a financing option, but not the only option offered. The “SBA-only” option is the norm for the largest players in this field. You are likely better served by your community bank if this is the only way the loan can work for you.
Agency Finance Specialists
The “yes” response is for the very small group of lenders that specialize in agency finance. These lenders understand the value you have created in your book of business and can be flexible, making a loan to your agency with your book of business as acceptable security. These lenders will help you compete with bigger players by providing capital for acquisitions and assisting you by keeping your options for growth and value building wide open.