Lending Landscape for Insurance Agencies in 2018

Here at AgileCap, we continue to grow and fund more deals for agency expansion through accretive book acquisitions every year. Asset-based insurance lending is a very small and specialized area of the commercial lending space, but it's a vital niche needed for the continued growth and profitability of insurance agencies around the country.

The financial ecosystem we operate in also helps related businesses, like insurance agency consulting firms close more broker acquisitions, and supplemental employee benefits firms increase their client lists.

What we have in common with the other lenders in our space is trying to find more creative ways to fund these entrepreneur's growth plans while securitizing these loans with a myriad of asymmetric assets and commission payout structures.

When an agent wants to expand through book acquisition or access operating capital, they are faced with a daunting task. They must determine where to apply for a loan, what the underwriting guidelines are, and most importantly, find the loan that best fits their situation. Some agents prioritize finding a program with the absolute lowest rate. Others might wish to use the cashflow being spun off to aggressively paydown the loan, thus reaching profitability projections ahead of schedule.

Fast Funding to Secure Books

Many times, expediency is the key here. Consultants value fast, reliable funding to maximize the ability of their clients to close on a sought-after book of business, and of course, getting paid their broker fees. In these instances, firms like AgileCap provide bridge loans, which secure the opportunity and allow time for permanent financing to close at a later date. Finally, with so many different types of insurance lines and the resultant disparity in payout percentages, overrides, retention rates and residuals, a knowledgeable lender is essential.

At AgileCap, we strive to be a very flexible lender with creative terms to meet individual situations created by the combination of all these variables. To do that, we must consider the collateral and agency financials along with the goal prioritization of the client as a unique underwriting case every time. Like fingerprints, no two deals are the same and all demand talented and dedicated staff at each phase of the transaction.

The loan officer (LO) must determine through the application process the most important aspects of the deal. Is the credit profile or distaste for personal guarantee making an SBA 7a program untenable? Or maybe the LO does qualify for SBA, and it's the best rate hands down, yet comes with caveats like extended time to close and quite a bit of paperwork, projections and guarantees. Maybe a bridge loan is needed to get to the SBA?

Bottom line, through careful observation, the LO can determine what options work best and hand it off to a talented team of underwriters that put the whole picture together and decipher what could best be described as a non-standard form of collateral in the traditional banking world.

The SBA 7a Package

As for types of loans and the programs available to these agencies, there is quite a diverse group for such a small and unique lending environment. Looking at it from a pure rate perspective, from low to high, there seems to be three distinct tranches of lenders, all with pros and cons. The SBA program designed for the insurance business, the 7a package, is the best rate and a vanilla fixed term loan with the lowest cost of funds period. The demand here is robust.

I touched base with our friends at Live Oak Bank in Wilmington, North Carolina to get an update on 7a packages. Kelly Drouillard, a SBA 7a Lending Manager at Live Oak Bank, said that, "at Live Oak, our SBA 7a insurance division has been very busy. Since December of 2015, we have funded 109 loans totaling 96 million dollars. The last 12 months accounted for more than half of that production. We are definitely seeing upward trends in the book acquisition area."

At AgileCap, we to have been very active fielding calls and funding loans at a record pace. While the SBA rate is best in show, the tradeoff is...|well, it's a little like a proctology exam - a long one!

There's the rub in a nutshell. If you can stand the process, have the benefit of time to close, and don't mind the attachment of personal assets clause, the 7a package is the loan to get.

I have often recommended that potential clients start there if I feel it's right for them and offer to "bridge to close"? if needed. We work with some of the best in the business and they are excellent loans. What you gain in low rates can be offset by the loss of flexibility, speed and bespoke lending options.

What Sets AgileCap Apart

This last set of options is where AgileCap comes into our own. We are self-funded or private money that demands on average a 6% premium to the traditional SBA package. For that, you get things like interest only options, no pre-pays and limited personal guarantees. You usually receive funding in 5 days or less after receiving the full document package.

Maybe you want to paydown principal aggressively or just need a temporary reduction in payment due to a new marketing campaign's added cash flow demands. The list of what you need and when can be obvious at the time of closing or latent and unexpected. Shops like ours excel at these programs.

At AgileCap, for instance, we have structured deals that incorporate interest only term with interim principal paydown, so agencies could maximize frontend loaded promotional and line specific bonus structures to payout; use those funds to paydown the loan, thereby lowering monthly loan payments; and arrive at a paid off book sooner. Rolling underwrites and a type of hybrid 5 year term allowing adds and draws help decision makers by adding flexibility to cashflow projections that ultimately steer an agency's business plan in a desired direction. Again, rates vs flexibility and eligibility are usually negatively correlated.

That leads me to the final tranche in our space, the high APR lenders who do daily and weekly payments, with rates anywhere from 16-80% APR. You might be more familiar with them if you think factoring and accounts receivable type structures. Once again, rate and optionality or eligibility are almost always diametrically opposed.

If you are an agent that is embarking on an expansion through book acquisition and in need of financing, I would recommend the following. First, make sure you buy the best book for your situation and particular agency makeup. Then, reach out to very experienced consultants who deal in this arena every day. These consultants are a valuable resource not only because they know what's for sale in a given geographic area, but they also have a level of competence when evaluating a book's makeup and can help guide you to a book that is most favorable to your situation.

As an example, we frequently work with the Springtree Group, the largest M&A organization in the USA that specializes in supporting insurance entrepreneurs in the under $5 million market space. According to STG CEO Sam Patterson, "STG provides consulting that includes the integration of the buying, selling and financing of insurance agencies into a seamless process."? One of STG's most well-known and progressive tools is the Monthly STG Sales Alert publication that profiles a minimum of 10 new insurance deals a month, or 120 deals a year to the STG buying group.

A successful business person is smart enough to know when they need to employ the services of someone with more knowledge and experience in a given area. We all work in the same space but have perspectives and levels of acumen within that same space, if you will. Working together in a professional manner, the ultimate goal is to help the agent or agency reach its goals. If we do our part well, we in turn become more successful and profitable.

Do Your Homework

The final thought for agents looking to grow is this: do your homework. The amount of options are many when it comes to securing a loan. Know what your personal credit profile is and the underwriting guidelines that affect you as an individual vs. those that are strictly business related.

Key Questions to Ask Yourself and Partners (If You Have Them)

• Do I have credit issues, UCC liens or real estate I do not want attached to the deal?
• Are we willing to get the best rate at the expense of personal encumbrances and full disclosure of personal financials?
• Finally, and most importantly, what is the goal of the transaction? To increase a book of business and resultant annual cashflow to the agency?

Further discussion should be had as to the structure of payouts and importance of timing as it relates to a free and clear acquired book of business and being able to move on to the next one. A seasoned and profitable agency looking to acquire more books has the added advantage of being able to cherry pick books with the best, most stable commission streams coming off them annually. They benefit the most from borrowed capital because they do not necessarily need the cash coming off these books to cover monthly expenses, allowing them to apply it in bi-annual chunks to loan principal which results in a free and clear book of business with little or no capital outlays at closing. We do a lot of these types of deals due to our flexibility in lending repayment terms.

For Newer Agents

Finally, my advice to newer agents or those who have never looked at financing a book of business is this:do not get caught up so much in what the rate is, you're not shopping for a mortgage, it's commercial lending! Look at your annual P&L and projected cash flow statements to get a current snapshot of how profitable you are today. Then, factor in the acquisition cashflows and any additional staffing or related monthly expenses you might need to support solid servicing of the added business.

Is that new book still accretive, and if so, can it alone support the loan payments?

That's what we call a no brainer. Other young agencies might need the current and existing book to make these numbers work. Whatever the situation is, find competent lenders who can discuss in detail options available to you.

We Keep Your Goals First

Ultimately, each one of these segments and the lenders that inhabit them has a market and therefore demand for their characteristics. At AgileCap, we are continually trying to tweak the matrix to stay ahead of the competition in our space. We listen to what our clients want and try our best to balance our ability to be profitable while at the same time offering a quality package for special situations.

The ultimate goal of every lender is to close loans and earn a rate of return on that invested capital that is acceptable. One must also add to that a strong fiduciary responsibility, always keeping the goals of the client ahead of your own. We strive to do that everyday and will always look to make sure an agent's lending package is what's best for their situation. That means sometimes referring them elsewhere, which is why part of my job description as Director of Strategic Initiatives is to keep building my contacts with various lenders, consultants and commercial brokers to ensure each client gets the appropriate terms for their continued success.

Jared Lagemann,  Director of Strategic Initiatives, AgileCap

435-513-9010

Thanks to:

Kelly Drouillard, SBA 7a Lending Manager, Live Oak Bank

877-890-5867

Sam Patterson, CEO, Springtree Group

972-395-8811