What are the Top 6 Loans For An Insurance Agency?
If you run an independent insurance agency, you may need a loan for any number of reasons. You may be looking to expand your agency, hire new agents, buy new equipment, or advertise your services. You may even be looking to engage in an agency acquisition of another practice across town.
6 Funding Sources For Insurance Agents
As an insurance agency owner, you have a variety of financing options.
1. The Small Business Administration (SBA)
Small Business Administration (SBA) loans can be a viable loan solution for insurance agencies. SBA loans are administered by financial institutions and backed by the United States government’s Small Business Administration. They can be a bit cumbersome to apply for, as they require a lot of paperwork and take about 6 weeks to process, but they often offer the most competitive rates (6.75%) and the longest repayment timelines (5 to 25 years). Insurance agents should look into the SBA 7(a) loan, which is typically the best fit for an insurance business because of the interest rates and repayment horizons, as well as the flexibility in permitted use of funds.
2. Wherever you get your merchant services (traditional bank or credit union)
Some traditional banks and credit unions do lend to insurance agencies. Loans typically range from $30,000 to $5 million, with interest rates at or above 7%. In order to qualify, you will typically need excellent business and personal credit. You may be asked or required to sign a personal guarantee. The bank may require extensive financial and tax documents to verify your business’s financial health, and it may take them up to 4 weeks to process your information and approve you. You may find that traditional bank loans offered to insurance agencies have rather stringent terms that you find unfavorable. Some traditional banks refuse to lend to insurance agencies because they consider the industry high risk and cyclical. If the economy does poorly, people don’t buy and insure a second car or construct a new home. When people lose their jobs, they may shop around for a new policy. These things pose risks to the financial health of the insurance industry, and banks are wary that insurance agencies may not be able to repay traditional business loans.
What is a personal guarantee?
Signing a personal guarantee means that you as an individual have made a legal promise to repay a debt that your business owes, even if your business is unable to pay. Creditors can come after your personal assets in the event that your business becomes insolvent. This can include your own personal checking or savings accounts and real estate. Use caution and be mindful of this when agreeing to sign a personal guarantee for a small business loan.
3. Alternative lenders
Alternative lenders like Biz2Credit, Kabbage, and LendingTree are eager to lend to insurance agencies, and may be a great source of funding if your insurance agency doesn’t quality for a bank or credit union loan. Alternative lenders offer shorter loan approval cycles, less paperwork, and have less stringent credit requirements. In turn, they will have higher interest rates (typically around 10% and up). Loan amounts from alternative lenders are usually $2,500 to $250,000 with 3 to 18 month repayment terms. You may be able to get approved and have your money in as little as one day.
4. Revolving line of credit from any of the above financial institutions
Lines of credit are similar to credit cards — but without the cards. Lines of credit can be useful for businesses that want to smooth their cash flow every month – the cash is available when you need it, and you need not use it if you have the cash on hand for your expenses. If you use a revolving line of credit, you pay interest only on the amount that you draw each month. Revolving lines of credit are usually in the $10,000 to $1M range and range from 7 to 25% interest. A lender may approve you for a line of credit in as little as one business day.
Lines of credit do not usually require collateral but do require excellent business and personal credit; may request 6 to 24 months of business financials in order to get to know your credit history. A line of credit can usually last multiple years as long as you remain current on your payments. Banks may also add call options to your line of credit, which give them the right to “call” your loan at any time, essentially ordering you to repay it in full and stop drawing on the credit line. Be sure to review the terms of your credit line carefully so that you don’t find yourself in a pickle.
Business credit cards are a great option if your business needs access to cash quickly. You may be able to find promotional offers for 0% APR for up to 15 months, or that offer 0% APR on balance transfers. Depending on the size of your business and your creditworthiness, the credit limit on your card may be as little as $2,000 or as high as $100,000 and up.
An additional perk that comes with business credit cards is points! You may be able to earn quite a few credit card rewards points if you funnel business expenses through these cards. There are many business credit cards to choose from. Websites like DoctorofCredit and NerdWallet can help you understand the differences, interest rates, promotional offers, and rewards.
6. Your personal assets
It is legal for you to lend money to your own business, but there are some requirements you need to follow. When you put money into your business, you need to carefully designate it as either equity or a loan.
Be careful if you are lending money to your business and taking on other kinds of debt like traditional bank loans. Banks want to make sure they will be paid first in the event of default, so you may need to suboriginate the loan to them, which basically means you promise to repay the bank before you repay yourself.
You should document any loan to your business in a promissory note and set forth terms such as the interest rate and repayment term. It is typically best if personal loans to your business are unsecured as opposed to secured. If you take on investors or partner with traditional lenders, they may balk at the fact that you are entitled to the assets of the business via your loan in the event of default.
And finally, the IRS will consider any interest that your business pays to you as taxable income that you will need to declare. And don’t think you can mask an equity investment as a loan – if the ratio of the loan to equity is too high, the IRS will claim that you made a capital investment. Subsequently, the loan repayments from your business to you will be treated as a dividend and will be subject to taxes.
An alternative to lending your business money, of course, is just to invest equity in your business.
How To Select a Loan For Your Insurance Agency
- Consider your creditworthiness. If you have a low business or personal credit score, your loan options may be constrained. Lenders care about whether the business and the business owner can be trusted to repay the loan. If your credit is bad, alternative lenders or business credit cards may be your best option. If you improve your credit score later (and you should), you may become eligible for more traditional loans.
- Consider how quickly you need the money. Each type of loan has its own process and timeline. If you need the money quickly, an alternative lender or line of credit may be the best fit. Whereas if you need the loan for expenses in a few weeks or months, a traditional loan may offer you the best terms and still meet your needs.
- Consider the lengths you are willing to go regarding time and paperwork to get a lower interest rate with an SBA or bank loan. Loan types vary in application complexity. If you are very busy and don’t have the time, energy, or requisite records to go through an SBA or traditional bank loan approval process, an alternative lender or business credit card may be a better fit, at least temporarily.
- Consider whether a revolving line of credit would be better suited to you than a lump sum loan. The best thing about revolving business credit is that you are charged interest only on what you draw out each month and use — not charged interest on an overall lump sum. If your need for a cash cushion is continuous and variable, a line of credit may be a great fit for your business, as it will offer you flexibility and a pay-as-you-go price.
- Consider how much loan you need so that you don’t overborrow. Pay special attention to prepayment penalties. There are numerous reasons to not over-leverage your agency to the hilt, including challenges repaying the debt month to month, as well as funneling your precious business cash flow into interest instead of reinvesting it in the business. In addition, overleveraged businesses can be challenging to sell. This may be relevant to you if you are looking to sell your agency in the near future. For certain types of loans there may be repayment penalties — particularly for traditional bank loans and SBA loans — which constitute another reason not to overborrow; it may be expensive to get out of a loan that is too large once you are in it. Know if the loan you’re taking has a prepayment penalty, which is a fee you have to pay if you pay off your loan early. It is usually a percentage of the loan’s total balance.
- Look into alternative lenders like Biz2Credit — they are typically best suited to support insurance agency loans. Insurance agencies can have a tough time getting loans because of the perception, however misplaced, that insurance is a cyclical and risky business. Alternative lenders like Biz2Credit are eager to support insurance agency businesses and their growth goals with loans of all sizes.
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