As posted on the Insurance Journal.
Lenders pulled back on business loans amid COVID-19, tightening criteria and even halting traditional loans to focus on Paycheck Protection Program loans. With the PPP program closed, insurance agency owners and leaders are returning to traditional lending for financing. As a result, lenders are seeing an uptick in requests for funding. How do you know if your business worth the risk for lenders?
If your agency’s business strategy involves a need for financial resources, a good first step is to understand what a lender wants for the underwriting and approval process. Before turning over any financial documents or completing the first application, research and find the best lending fit for your business’ needs. Options include commercial banks, SBA loans, or niche lenders. We have been a niche lender since 2003, working in specialized business segments, including supporting the financial needs of insurance agency owners.
The financing requests we get vary from agency to agency. While one owner may need a line of credit for working capital, another may need a loan for an acquisition. Be sure a lender can accommodate your unique needs and cater to your business for continued cash flow and business growth. Ask about types of loans available for business and lending limits.
How to partner with a lender
Lenders need to understand your business, your business plan, and review your current and future financial situation to decide if your request is credit worthy. Here is what to expect to be prepared to work with lender.
The following list outlines what a lender will request and why. During the lending process, as you and the lender work together to determine if you are a good fit, expect the lender to prepare a term sheet and a deal map.
A lender will ask for the basics, including amount of the loan request and how cash will be used. Be prepared to provide corporate legal documents, including contracts with your insurance carrier or MGA. For an acquisition, provide the purchase agreement or letter of intent along with relevant financial projections. Lenders need to understand the company’s strengths and weaknesses to make a loan decision. They’ll ask about the business structure, ownership team, key employees and business partnerships, how long you’ve been in business, and future business plan.
Don’t be alarmed if lenders note potential business weaknesses. For example, if the agency operates without a controller, it could be perceived as a lack of accounting depth. That doesn’t mean the request will be turned down. It is a factor underwriters will note and take into consideration with regard to terms of the loan.
You will be asked for three years of historical financials, including income statements and balance sheets. Lenders run your personal credit score and will ask you to complete a personal financial statement. Tax documents also will be required. Lenders use financial documents to see revenue sources and how long they’ve been in place. They want to see how revenue is tied to clients along with future agency performance. They’re looking at how your books are organized and to understand any uncommon expenses.
Uncommon expenses could include a larger than normal overhead that includes rent or an office with extravagant furniture. Owners sometimes run personal expenses through their books with the idea this will help to decrease their tax liability. Expenses such as family members on the payroll or country club dues may raise questions. It’s best to review these items before a lender’s financial review.
Cash flow is the primary source of repayment for loans. Lenders look for secondary sources of repayment in case the business doesn’t perform as planned. For insurance agents, having the right lending partner is important when it comes time to review collateral. A niche lender that understands how an agency works creates a collateral stream using recurring income, normally considered an intangible product. Credit worthiness is derived from the predictability of the future cash flow.
In the future, an owner may sell their agency. Lenders may rely on third-party valuations to determine if a sale would provide sufficient funds to repay the loan. For larger loan transactions, a third-party business (enterprise) valuation of the agency may be requested. There’s no need for a borrower to prepare anything. Lenders have pre-approved firms to prepare such a valuation.
With a basic understanding of what a lender will review, it’s time to find the right capital partner. Ask questions to be sure the lending options available support short-term needs and long-term growth. This creates a long-term financial relationship designed to meet your agency’s growth.
Rick Dennen is the founder, president & CEO of Indianapolis-based Oak Street Funding, a First Financial Bank company with customized loan products and services for specialty lines of business including certified public accountants, registered investment advisors and insurance agents nationwide.
About Oak Street Funding
Indianapolis-based Oak Street Funding, a First Financial Bank company, provides customized financial solutions for businesses in various industry sectors and third-party loan servicing for financial institutions. Oak Street Funding incorporates industry knowledge, easy-to-use technology and exceptional employees to deliver top-quality service and capital products to niche businesses nationwide. With in-house sales, underwriting, and servicing teams, and direct access to the CEO and executive team, Oak Street Funding is well-positioned to meet lending needs of borrowers in all stages of the business life cycle.
Hostetler Public Relations
Representing Oak Street Funding