Download What Agencies Can Expect Accessing Bank Capital in

Special Report Agency Options - Financing
What Agencies Can Expect Accessing Bank
Capital in the Current Credit Crunch
How to Properly Position an Agency When Planning to Borrow From a Bank
Pettinicchi
By Robert J. Pettinicchi
E
very morning, stories of financial
While not a traditional borrower, insurance
sector gloom and doom fill the agencies still are desirable clients to banks
airwaves. A slowing economy has because they tend to be substantial depositors.
affected the ability of individuals Banks will preserve this one-way relationship
and businesses to pay their bills. The term by occasionally making small loans to agencies,
“credit crunch” has become
impressing
the
agency
a part of the daily lexicon,
principal with the good relaInsurance agencies tionship they have with the
with loan losses and forestill are desirable bank. But a good test for your
closures at banks reaching
record highs.
clients to banks banker is to ask if your agency
Experts now believe there
because they tend would qualify for a large loan
to be other problems on the
make an acquisition. If the
to be substantial to
horizon with consumer,
banker’s eyes gloss over, you
depositors.
credit card, and commercial
may need to re-think your
business and real estate loans.
bank relationship.
Bank failures and increased regulatory pressure
stress the financial system, restricting credit. Understanding the Agency Business
Only high quality, well-prepared, and creditBankers prefer to make loans to more tradiworthy individuals and businesses will find tional borrowers with tangible assets. Thus,
credit available in this crunch.
in difficult credit environments, working
Throughout my career, I have observed a with a lender who understands your business
flight to quality when credit gets tight. becomes more critical for obtaining credit.
Lenders are less willing to stretch to make a Despite many banks’ limited credit appetite
loan. Few are willing to underwrite loans in an in times of tight credit, loans to
industry they do not fully understand nor are insurance agencies can be a good
completely comfortable with.
bet because of good repayment
Unlike traditional distribution and manu- histories and predictable
facturing businesses, an insurance agency has agency cash flows.
a unique business model with low capital
Expect all lenders to require
requirements and no significant working financial information for a loan
capital needs (unless there is an acquisition application. Putting together
opportunity). But when capital is needed to this information should be
seize an opportunity, such as the purchase of easy for a well-run
a competitor, the buyout of a retiring prin- agency, but many owners
cipal, or the lift-out of a business unit, the neglect this area. The
capital required can be substantial. Since easiest way for a bank to
many principals may never have borrowed take a pass on a loan is the
from a bank, they may not be familiar with inability of an agency to
how credit is gained.
provide financial informa-
tion. Also, a banker will treat your loan inquiry
as suspect if a request for information is met
with: “Why do you need that?” Such responses
can precipitate a loan denial.
Types of Loans Banks Offer
Assuming your bank would be willing to
make a loan to your agency secured by the
assets of the business (rather than based on
mortgages on the principal’s residences) here’s
what you can expect:
Acquisitions. For most acquisitions or
internal purchases, a fully-amortizing five to
seven-year term loan is standard. Usually an
acquisition will require 30 percent equity in
the transaction (which may consist of existing
business value). In a perpetuation, anticipate
bank financing to account for about 60 percent
of the total requirement. The remainder may
take the form of a note from the seller or some
other deferral. If an acquisition needs a 10- or
15-year repayment to cash flow, it is not an
appropriate risk for a bank, nor a good investment for the agency.
Credit Lines. A line of credit may
be extended to agencies to augment
working capital. Since the working
capital need for most agencies is
minimal, most line limits are small,
representing approximately twomonths of commission revenue,
or less. Often lines are used to
prepay expenses or pay
bonuses prior to the end
of the fiscal year in anticipation of profit sharing to
be received.
Producer Finance. Loans
to finance new producers have
Special Report Agency Options - Financing
the look of both a line and a term loan
whereby a line is advanced to cover the costs of
the new producer during their ramp-up
period. At the end of 12 to 18 months, the line
balance is converted to a term loan to be
repaid over three years.
All bank loans will have covenants, which
are promises made by the borrower to the
bank regarding the submission of financial
reporting and other monitoring factors used
by the banks. During this credit environment,
financial covenants may still be negotiable, but
most representations and standard terms,
such as personal guarantees and default provisions, are non-negotiable.
Nine Questions To Ask
Agency principals should ask themselves
key questions to check their strengths in
accessing capital.
1. Is your agency profitable as a result of
receiving profit sharing from your carriers or
would you report a loss if the bonus was
reduced/eliminated? Well-run agencies, like
well-run households, need to live within their
means and treat bonuses as windfalls, realizing that they may not always be received.
2. Is your agency consistently in trust?
Contrary to popular belief, the balance sheet
does matter! An out of trust agency can imply
poor financial management (or worse, dishonesty). Related is having adequate working
capital. A well-run agency should have 30 days
of working capital. Stripping the agency of
cash only benefits the owner in the short run.
3. Does your agency maintain good financial
records and does your accountant produce a
financial statement that is reviewed, or at least
compiled? While tax returns are useful,
9. Have you maintained a very good
bankers prefer to also receive a full set of finan- personal credit standing? You will be
cial statements with opinion and footnotes. required to personally guarantee a bank loan,
You’ll need to provide three
and will likely pledge your
years of financial statements.
A prudent agency stock in the agency as added
Be prepared to provide
The creditworthiowner will seek to security.
production summaries for the
ness of a business owner is
borrow the least one of the best indicators of
last fiscal year and the
amount of money the propensity to repay a
current trailing 12-month
period. This report should be
for the shortest business loan.
provided by customer, line,
reasonable period. Reducing Risk
carrier and producer. Also,
provide actual insurance
A prudent agency owner
company data (production reports or experi- will seek to borrow the least amount of
ence reports) from your top five carriers to money for the shortest reasonable period.
confirm the data.
This will reduce risk, reduce cumulative
4. Do you use the capabilities of your agency interest paid, and keep borrowing capacity
management system and compare data with available for future opportunities. You need to
the Big I’s “Best Practices” results?
ensure that your business is on solid financial
5. Have you borrowed money from your footing to gain access to capital. However, you
agency? Pay these loans back, as your banker will also need to present your business in the
will not be pleased to see these. Also, if you best light to convince a lender that your
take a bonus consider loaning some money agency is a good risk.
back to the business to repay debt or
As professional risk managers, agency prinreplenish working capital. (Bankers like this, cipals must realize that an inability to access
particularly if the loans have no set repay- capital puts their own business at risk. This
ment terms.)
threat can be lessened significantly if one
6. In a period of lower margins, have you understands how to properly position their
increased your salary or draw? Is spending on businesses to borrow from a bank. Uncertain
your lifestyle reasonable?
times always create opportunities for those in
7. Are you actively managing your accounts a strong financial position who can readily
receivable, or are you supplying credit to access capital. IJ
your clients?
8. Is your balance sheet swollen from an
accumulation of unreconciled carrier payables? Pettinicchi is chief lending officer of InsurBanc, a federal
This is a problem that reflects sloppiness and thrift dedicated to providing banking products and
only gets worse (and more costly to correct) services to independent insurance agent. Web site:
www.insurbanc.com. E-mail: rpettinicchi@insurbanc. com.
the longer it is ignored.
Reprinted with permission from Insurance Journal, August 4, 2008. On the web at www.insurancejournal.com.
© Wells Publishing, Inc. All Rights Reserved. FosteReprints: 866-879-9144, www.marketingreprints.com.
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