Insurance Professionals: Use Debt Consolidation to Fund Growth

If you’re in the insurance industry, you know there’s a lot of financial volatility inherent in the business. Sales go up and down, new expenses arise, and out of the blue, you can get hit with a commission clawback you weren’t expecting. Many agencies deal with these situations by taking on debt in a piecemeal fashion, resulting in a balance sheet with a long list of liabilities with varying due dates and interest rates.

What many agencies don’t realize is that consolidating that debt can bring a wide range of benefits and can help fund future growth. Read on to learn how this powerful tool can help you streamline finances, reduce monthly costs, and stabilize your profit and loss statement.

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Reality of debt in insurance agencies

All businesses have cash flow pressures, but insurance agencies face some unique challenges. Payroll expense for new hires before they become reliable producers, ebbs and flows in sales from month to month, unexpected commission chargebacks, and payments for lead software are all variable factors that can put a dent in cash flow.

To meet these pressures, many agencies turn to debt funding. It’s important to recognize that there is “good” debt, such as a well-structured loan with favorable terms used to buy a book of business, and “bad” debt, including high-interest credit cards and unfavorable working capital loans taken out to keep the agency’s head above water during tight periods.

Benefits of debt consolidation

Combining a jumble of bad debt into a single new loan with a lower interest rate and longer payment period brings many benefits:

• • Freeing up capital - With a lower interest rate and a longer term, the consolidated loan lowers your overall monthly payments. This frees up capital that can then be used to fund growth initiatives such as an acquisition or technology updates.
  • Improving Debt Service Coverage Ratio (DSCR) – DSCR is an indication of whether a company has sufficient cash flow to pay its debts. The formula for calculating DSCR is Net operating income / by debt service (current debt obligations). Because total monthly payments make up the denominator in the DSCR calculation, lowering those payments will make the agency look financially stronger for future major investments, such as purchasing a book of business.
  • Gaining financial clarity and reduced stress – With one predictable line item in the budget, not a mishmash of notes and credit card payments due at different times and with different interest rates, it’s easier to see what the agency owes and when it’s due

What’s the best time to consolidate?

Consolidation makes sense almost anytime, but there are certain situations where it’s an especially good idea:

• • Prior to a major acquisition – Lenders like to see clean, streamlined financials. Consolidating all your debt into one liability makes it easier for lenders to evaluate your agency’s financial situation and may expedite the loan process.
  • If high-interest credit card spending has become too high or too common – Business credit cards are a convenient tool for paying for company meals and assorted petty expenses, but when an agency starts to use them to cover cash flow shortfalls – especially if they do this often – then consolidating debt into a lower-interest debt instrument may be a good call.
  • To deal with unexpected clawback demands – Nothing is quite as disappointing as having to give back a hard-earned commission, but it’s a reality in the insurance business. A consolidation loan can be a good source of capital for the necessary repayments.
  • When planning significant technology upgrades – A consolidation loan can free up capital to invest in Customer Relationship Management (CRM) software, Agency Management Systems (AMS), or lead generation tools needed for scalable growth.

Why specialized lenders are a good choice

Ordinary banks are hesitant to make loans to companies without fixed assets (such as buildings and equipment) for collateral. A specialized lender such as Oak Street Funding has decades of experience working with insurance agencies. We know how to value your future expected cash flow so it can be used as collateral for a loan.

Oak Street also knows about the insurance cycle. We can create a loan product and repayment schedule designed around the commission-driven cash flow of an insurance agency.

Summary

Consolidating debt is not an indication of questionable decision making. On the contrary, it’s a sign of sophisticated financial management and a clear strategy for profitable expansion.