Insurance agents who need financing to purchase a new agency or improve one may have an innovative option. You may be able to use a business book to obtain financing.
What is a business book?
A business book is an agent’s list of accounts or clients. It should include all clients/clients an agent has worked with in the past, with new information added as relationships progress.
The details a business book contains might include the revenue generated by that customer, basic demographics like age and occupation, references (if any), and potential future needs.
And you can also use an insurance portfolio to get long-term, low-interest financing, using rolling commissions as collateral. But agents should check with their individual brokers or franchisors to determine if they are eligible.
Traditional lenders, like big banks, tend to want material, tangible collateral. Rarely does an independent agency have enough firm collateral for a loan large enough for its needs. Therefore, you need to find a lender that specializes in insurance business financing who understands the value of a business portfolio.
How does the business finance book work?
Have a professional firm assess the volume of business to help you determine an appropriate selling price. In the industry, the average selling price of a business portfolio tends to be around 2 -; 4 times the annual salary. It’s a good idea to do more than one business valuation. Since each company uses slightly different standards, the end results will vary. These differences will have a significant impact on the loan amount, fees and repayment terms.
Lenders depend on the valuation to verify the relative strength of business volume.
• Create a business plan. Show the lender that you have the skills and experience to run an agency profitably. A well-written business plan should address any potential challenges you may face, clearly showing how you intend to maximize the profit potential of your new asset.
• Search for specialist lenders working only with owners of insurance agencies. Specialized lenders will see the potential power of a large volume of business and know that it is an asset to secure your loan.
• Check all the loan offers you receive to determine which one best suits your situation, your time frame and your available budget.
Lenders consider a combination of activity, cash flow and efficiency of operations, to see the likelihood that an agency will continue to generate consistent commissions from its existing clientele.
The more diverse the book is across agency clients, lines of business and insurance companies, the more favorably it will be viewed by specialty lenders.
Insurance agencies often have more reliable cash flow than other midsize businesses because they provide a service that individuals and businesses have depended on for years. In addition, revenues and cash flows are predictable since they come from ongoing commission income.
Maximizing the value of an independent agency means effectively reinvesting in the business while reducing unnecessary expenses. Lenders who understand insurance will prefer to lend to agencies that operate efficiently.
But since the business portfolio is the collateral securing the new loan, it can be lost in case of default.
All you need to qualify is a business book with recurring commissions. You can even use the business volume as collateral to get a loan to buy an independent insurance agency. Therefore, your personal credit may be average and you may still be approved. Lenders mainly want to make sure that you have a viable book of revolving commissions for your agency.
The business finance book can be an effective use of a vital asset, to buy an agency or obtain funding to improve one. One volume of business is valuable, but different valuations can yield different results