As an insurance agency, there are a huge variety of reasons why you might need a loan; for example, you might want to expand and open a new location, hire new agents, cover short-term overhead costs, or finance a competitor agency acquisition.
But as an insurance agency, the types of loans your insurance business qualifies for may be more limited than other industries; for example, life insurance companies aren’t eligible for loans through the Paycheck Protection Program—or because many insurance agencies work off commissions, your business might be considered high-risk, which can make it hard to secure financing from certain lenders).
So the question is—which business loans are you eligible for and which is the best loan for your agency?
Let’s take a look at some of the loan options available for businesses in the insurance industry—and how to determine the best insurance agency loans for your company:
Criteria to use when determining which business loan is the right fit for your insurance agency
Before we jump into the different types of business loans available for insurance companies, let’s first cover the criteria you should use in evaluating loan options and determining which loan is the best fit for you and your business.
Some factors you’ll want to consider when choosing a loan for your insurance agency include:
- Interest rates. Loans with lower interest rates can save you tens of thousands of dollars over your loan term. When looking at business financing options for your insurance agency, make sure you’re comparing small business loans to find competitive interest rates.
- Repayment term. Your monthly budget and how quickly you can repay your loan will play a large role in determining which loan is best for your independent insurance agency. Generally, longer repayment terms come with a lower monthly price tag—but you’ll pay more in interest over time. Loans with shorter repayment terms will have higher monthly payment, but you’ll save money in the long term.
- Eligibility criteria. Before you decide on the right loan for your insurance agency, you need to make sure you qualify for that loan. Make sure to research the eligibility criteria (both in terms of credit history/credit score and industry eligibility) and confirm you qualify before applying for financing.
- Purpose of the loan. There’s no one-size-fits-all solution for choosing a business loan; the best financing for your insurance agency is going to depend on your situation and the purpose of the loan. For example, if you need short-term funding to cover this month’s overhead expenses, the best loan option might be different than if you were looking to finance a large scale expansion.
- Fees. Some business loans might seem like they have competitive interest rates and repayment terms—but when you factor in the loan’s exorbitant fees, it no longer seems so attractive. Before you decide on the best financing option for your insurance agency, make sure you read the fine print and are aware of any fees you might incur over the course of the loan (for example, signing fees, late fees, or early repayment fees).
Weighing each of these options can help you better evaluate the financing options available for your insurance agency—and, ultimately, decide which is the best option for your business.
Insurance agency loans to consider for your business
Now that you understand how to evaluate and choose the best loan for your insurance agency, let’s look at the different financing options available for insurance companies:
The United States Small Business Administration (SBA) offers a variety of lending options to small businesses, including SBA 7(a) loans, which can be a viable option for insurance companies. Through this SBA loan program, insurance agencies can apply for loans anywhere between $5000 and $5 million—and while there can be a lot of paperwork associated with securing funding through the SBA, these loans typically offer more favorable terms for small businesses, including lower interest rates (interest rates for SBA 7(a) loans start at 6.75 percent) and longer repayment terms (between 5 and 25 years).
Traditional bank loans
Depending on the financial institution, you may be able to get a loan directly through your bank or credit union. Typically, these loans range anywhere from $30,000 to $5 million with interest rates starting at 7 percent (although actual interest rates can be much higher).
Securing business loans through a traditional bank or credit union can be challenging for an insurance agency. Typically, the bank will require documentation (including tax documents and bank account statements) verifying the financial state of your insurance agency—and even if your business is doing well, the nature of insurance may cause the bank to put you into the “high-risk” category, which can impact the terms of your loan (for example, a higher interest rate).
Before you apply for a loan with a traditional lender, make sure you understand their eligibility requirements and whether they’re willing to work with insurance companies.
Small business loans from alternative lenders
If your insurance agency doesn’t qualify for a traditional bank loan, alternative lenders (like Biz2Credit) can be a great option for securing the financing you need for your insurance agency.
Alternative lenders offer a level of convenience that’s typically lacking in other financing options, including shorter approval cycles, less paperwork, and lower credit standards—and money is often transferred significantly faster, sometimes in as little as one day.
Loans from alternative lenders do, however, have higher interest rates (usually 10 percent or higher) lower borrowing thresholds (alternative lender financing typically caps out at $250,000), and shorter repayment terms (anywhere between 3 and 18 months), so that’s something to keep in mind when taking on this kind of business debt.
Lines of credit
A business line of credit works similar to a business credit card. When a financial institution loans you a line of credit (generally between $10,000 and $1 million) you have the option to use a portion, all, or none of that line of credit—and you’ll only pay interest on the portion you use. And, just like a credit card, interest rates for lines of credit can vary depending on your credit history (typically anywhere between 7 and 25 percent).
If you need cash on hand to cover short-term or variable expenses, securing a revolving line of credit could be a good option. Just keep in mind that you’ll need excellent business and personal credit in order to get approved and secure a competitive interest rate.
Book of business loans
Book of business financing leverages your insurance agency’s book of business—or, in other words, your future commissions—as collateral for the loan (if you’re looking to buy an existing insurance agency, you can also use that book of business as collateral for a loan). While leveraging your book of business could put your future commissions at risk, it also can help you qualify for better terms and a higher loan amount, which can help to grow and expand your insurance agency.
If you’re thinking about applying for book of business financing, you may want to seek out a lender who specializes in the insurance industry and can properly evaluate the value of your book of business. A traditional bank or lender may not view the book of business as adequate collateral and may either deny your loan or approve the loan with less-than-favorable terms.
If you’re launching a new insurance agency, you’re going to need working capital to get started (for example, many large insurance companies require insurance brokers to have at least $100,000 in capital before they start an agency). Loans targeted towards startups and new businesses can be a great way to secure that funding and get your business off the ground.
The interest rates, repayment terms, loan amount, and eligibility requirements for startup funding will depend on both the lender and your credit worthiness; make sure to research the different startup loans available to find the option that makes the most sense for your insurance agency.
Choose the best loan for your insurance agency
Navigating the financing options for insurance agencies can be challenging. But now that you know the different loans available to insurance companies—and how to evaluate them—you’re armed with the information you need to choose the best loan for your insurance agency.