Over the last several years, businesses of all industries were in a “perfect storm” when it came to the struggle of accessing credit. Agents and brokers who needed extra capital to grow through acquisitions, hiring, refinancing agency debt to improve cash flow and meet other strategic objectives often couldn’t get funding. What’s more, aging owners who were ready to perpetuate found themselves in a quandary as chosen successors with plans to buy into ownership experienced similar, if not greater challenges.
So, now that the economy is stronger, are conditions better or worse for agents and brokers who desire funding?
Myth: The economy is stronger, so traditional bank loans are easier for insurance businesses to obtain.
The economy has improved and banks are lending more to businesses in general, but the availability of credit to insurance agents and brokers has remained virtually unchanged. Most traditional banks still believe there’s too much risk in collateralizing a loan with intangible assets like future commissions. They prefer tangible assets like real property and CDs as security. As a result, banks generally haven’t changed their position and don’t prefer lending capital to agency owners without the security of personal assets.
When traditional banks do decide to extend credit to insurance businesses, in order to minimize risk, credit is usually provided with a greater number of covenants that are more complex than you may find with other lenders. The covenants can include requiring borrowers to maintain certain net working capital, debt ratios and other financial metrics. While loans can provide much needed capital to meet business goals, covenants can burden agents and brokers as they must ensure compliance with them. If those covenants are breached, the results can mean financial penalties, increased interest rates and even the bank calling in the loan.
To fulfill the ongoing need that agencies have for capital, nontraditional lending sources stepped up during the credit crunch and continue to do so. While these commercial and niche lenders are just as concerned about managing risk and avoiding losses as other institutions, they are not subject to some of the same regulations as banks and credit unions. As a result, they can extend affordable credit to businesses secured by collateral that might otherwise be ineligible for traditional bank loans. Nontraditional lenders realize the most valuable asset of agents and brokers is the cash flow embedded in their book of business and they understand these assets.
Like banks, nontraditional lenders offer different types of loans, including ones with variable and fixed rates. However, nontraditional lenders have more flexibility in how loans are structured and develop lending models that specifically address agent and broker needs. They are typically entrenched in the industry, deeply understand how agencies and brokerages operate, and have the expertise and actuarial models to analyze commission streams.