Insurance policies protect families and businesses across the country. Many insurance agents find their job rewarding, not just financially but because the product they sell gives people peace of mind. If you’ve been thinking about opening, acquiring, or expanding an insurance agency, the industry will welcome you.
Independent insurance agencies thrive in the United States, there were over 36,000 agencies in 2020 . Agencies with less than $150,000 in revenue made up 32% of all agencies, medium to small agencies with $150,000 to $499,000 of revenue were 27% of all agencies, and medium agencies that had $500,000 to $1.25 million of revenue 24% of all agencies. It’s clear that small to medium agencies have significant footholds and opportunities in the insurance industry.
In small towns and metro areas, agencies have been growing, with agencies in medium metro areas holding steady and declines in larger metropolitan areas. Agency writers – versus insurers who sell policies directly – wrote 53.8% of P/C insurance net premiums, 64.4% of personal lines, 62.4% of homeowners, and 65.5% of personal auto policies in 2020. Despite the rise of online insurers, consumers still want the personal touch.
It’s a good time to open or expand an insurance agency in a smaller market, but to accomplish your business goals you likely need access to capital. Borrowed funds give small business owners flexibility and capital. By asking yourself the right questions, and doing your research, you can find the best business loan for your insurance agency.
Why would you need to borrow? Just like you ask your clients questions to determine the type of policy and amount of coverage they need, ask yourself these questions to determine the best loan product for your business.
Do you need to invest in a new office, or remodel an existing space? A longer-term loan might best meet your needs. Or, maybe you are having cash flow difficulties and need funds to meet payroll obligations? Look into a working capital loan.
Loan products serve different purposes. Just like you wouldn’t sell someone a life insurance policy if what they need is a homeowners policy, the reason you need to take out a loan will direct you to the best loan type.
Once you know why you need to borrow, calculate the total amount you need to borrow to cover that need. For a remodel, get estimates from contractors. For a payroll loan, determine your total payroll obligations and if you need to cover several payroll periods.
When you apply for a loan, you’ll want the loan’s capital to cover 100% of your needs. If it falls short, you might have to borrow again before you’ve paid off the original loan. Getting into this situation – called loan stacking – can make it difficult to break a cycle of ongoing debt.
Loans also have different borrowing limits. A credit card will likely have a lower limit than a business line of credit, and a lender might fund a small business loan for even more. Establishing how much you need to borrow before applying for loans helps ensure your project’s success and directs you to the right lender.
If you’re borrowing to cover working capital needs, you might only need a loan for a few months. For a larger project, such as opening a new office or a new website build, you might need access to funds for several months or years.
Small business loans have different repayment terms. Generally speaking, you should take out a loan with a term that aligns with the amount of time you need to use the loan’s funds. It’s counterintuitive to be making payments on a loan after you’ve received the benefit from its funds.
The loan’s interest, fees, and capitals are spread out (or amortized) over this term. A longer term usually equals smaller payments because you have more time to pay it back. But, regardless of how long you take to repay the loan, you’ll want to make sure you can repay it.
Agents often explore a clients’ financial situation when pricing out policies, but now is the time to turn that same attention to your business’ finances. Look at your budget and projected cash flows and consider how a loan’s payment will impact them. You’ll want to be confident that you can repay the loan before applying.
Failure to repay a loan, or making late payments, can have serious consequences for your credit score. As an insurance agent, you’re familiar with how credit scores impact insurance premiums and other aspects of your client’s financial lives, so you know the importance of protecting your own score.
As important as your credit score is, sometimes you face difficult choices in life. You may have been in financial difficulty in the past and missed a few payments or defaulted on a loan. If you have a lower credit score it will be hard, but not impossible, to obtain a business loan now.
Some lenders will only lend to borrowers who have credit scores within a certain range. Knowing your score before approaching lenders can direct you to a lender willing to work with you.
Once you’ve examined your borrowing needs and business circumstances, you’ll be in a better position to select the best business loan for your insurance agency.
Working capital loans help small business owners who need access to cash fast. Working capital funds your daily operations – rent, payroll, and utilities. It doesn’t fund an expansion or larger business purposes, it keeps the doors open. Many small business owners find that cash flows can be unpredictable, and if you’re waiting for payment you could struggle to meet operating expenses.
Working capital loans smooth over cash flow bumps. After you apply, they can fund within 24 hours. All you need is a credit score above 650, two months in business, and $10,000 of minimum monthly revenues. Working capital lenders will fund loans up to 70% of monthly gross deposits. These loans offer quick access to the capital you need to keep your business running smoothly.
A merchant cash advance allows small business owners to turn future cash flows into present cash in the bank. With a merchant cash advance, the lender analyzes past credit card receipts to project future cash flows. They then advance a sum of money based on those projections.
Qualifications include a minimum credit score of 500, two months in business, and minimum monthly revenues of $8,000. Advances range from $8,000 to $250,000, based on revenues. The MCA lender deducts their repayment from future credit card sales, making it one of the easier loans to repay. You don’t have to worry about keeping cash in your bank account to cover a large, monthly payment, and repayment matches your cash flows.
What if the majority of your income comes through automatic, or ACH, deposits into your business bank account? You could qualify for a revenue based loan. When funding these loans, lenders primarily look at your business’ revenues.
Because revenues matter more, borrowers with a credit score as low as 530 can qualify. The lender may take their repayment through an ACH deduction from your bank account instead of as a percentage of credit card sales.
It’s not uncommon for small business owners to have several open forms of credit – as cash flow issues arose, or as they overlapped with larger business plans, you may have opened a credit card or taken out a small business loan. But, over time, juggling multiple payments and servicing the debt can become burdensome.
The solution is a debt consolidation loan. Debt consolidation loans pay off all your existing loans and roll them into one, new loan. Instead of dealing with multiple lenders and payments, you’ll have one of each. You could end up paying a lower interest rate than the blended rate on your existing debt.
If you work with a traditional lender, such as a bank, they may require that you pledge collateral to secure your loan. But pledging business assets – such as investment or retirement accounts, or physical property – puts your business at risk. If you default on the loan, the lender can seize those assets.
If losing a major asset could put your business’ continued operation at risk, look into an unsecured business loan. These loans don’t require collateral. Borrowers need a credit score above 500 and one year in business to qualify.
While you could pay a higher interest rate – rates range from 9% to 45% – this is because an unsecured loan represents greater risk to the lender. It could be worth it to your business if it keeps important assets safe and yet fills your funding needs.
Insurance protects people and businesses in emergency situations, but insurance agencies can sometimes find themselves in an emergency situation of their own. Emergency business loans fund quickly, with minimum underwriting. These loans work with borrowers who have low credit scores, as long as they can prove sufficient monthly revenues.
Because they fund within as little as 24 hours, and with less underwriting, the lender has more risk. To compensate for this risk, they’ll charge a higher interest rate. While that may sting in the short-term, in the long-term one of these loans could save your business.
If it’s time to take out a loan for your insurance agency, reach out to one of the loan specialists at Shield Funding. We can answer any remaining questions you may have and will work with you to make borrowing a success.
