Should I Refinance My Existing Bank Loans?
Monday, November 9
With current interest rates, now might be the ideal time to consider whether to refinance agency debt or consolidate debt. Consider this situation:
Your agency currently owes the bank about $180,000 on a loan you took out three years ago to buy out a former partner. Your monthly payment is $4,300. You can't quite remember what your original interest rate was, and you recall borrowing about $300,000 originally. You haven't pulled out your loan paperwork since you closed the loan three years ago, because you have been busy growing your agency. Your gross commissions have grown from $600,000 per year to about $700,000, and it's time to consider making a few changes. First, you would like to remodel part of your office, which will cost you about $50,000. There is also a $30,000 balance on a note payable to another former partner from five years ago. You make monthly payments on this note at about $1,000 per month.
Should you take out a new loan for $50,000 for the remodeling and leave the other two loans alone?
Can you afford the payments on the new, $50,000 loan and the two existing loans?
What if you hit a few rough months where cash is tight?
How much can you borrow? Should you borrow?
Things to Consider
These are all great questions you would likely ask yourself. If you are lucky, you have a strong relationship with your banker who can help guide you in coming up with the right answers. Your banker will run different scenarios for you that include the possibility of consolidating your three loans into one at current interest rates.
For example, if you were to consolidate all three loans into one $260,000 note at 4.25% to be paid in full over five years, your monthly payment would be about $4,800, which is less than what you are paying on your two existing loans. This may be a good deal for you.
Additionally, the total agency debt of $260,000 is well below the $700,000 annual gross commissions, so based upon several factors about your customer mix that your banker will discuss with you, there is likely sufficient collateral to make this loan.
Finally, have you considered a small line of credit to guide you through any rough spots that might arise? Most companies have an emergency line of credit to give them peace of mind for any unforeseen circumstances.
My advice to you is to find a banker you can talk to who understands your industry. Someone you can trust. The relationship is invaluable as you grow your agency.
Paul Rudersdorf is CEO/president of Security Financial Bank, a Wisconsin financial institution that specializes in the insurance agency industry. For more information, visit https://www.sfbank.com/insurance-agencies.phtml
Why It is Critical for Your Bank to Understand the Insurance Industry
Friday, August 28
by Paul Rudersdorf
Not every bank is equipped to finance the purchase of an insurance agency simply because they don't understand the nuances of the industry. At Security Financial Bank (SFB), we're different. When we say we get it - we really do. We understand that excellent management leads to business stability and customer retention. We see your book of business as a predictable earnings stream.
But, it wasn't always like that. Initially, our lenders and credit analysts were uninformed about what comprised the financial viability of an insurance agency. So, we decided to get educated.
First, we needed to have a basic understanding of the industry. A CPA firm with industry expertise met with our lending and credit teams over several sessions to educate us on how agencies are valued and how to analyze and dissect an agency's "book of business." This was an invaluable exercise.
Subsequently, we had the opportunity to educate our Board of Directors so all areas of the bank had a strong understanding of what makes an insurance agency prosper. And eventually, we even created a separate section in our loan policy to address this significant niche.
Over the years, we have learned that for a bank to partner in lending with an insurance agency, it requires much more than turning on a switch to enter this lending arena. There is work to do and knowledge to acquire. At SFB, our commitment began with education and has taken years to refine by doing transactions that make sense.
If you would like to learn more about how we can use our industry expertise to help you with your next project, please contact us. We look forward to partnering with you.
Paul Rudersdorf serves as president and CEO of Security Financial Bank, a $500 million community bank focused on business and agriculture headquartered in Eau Claire, Wisconsin.
What Does a Bank Look for When Determining If they Will Finance an Agency Purchase?
Tuesday, August 18
When considering a loan request, many variables are considered - especially when financing something specialized as an insurance agency. Most banks do not feel comfortable financing a "book of business." Our research has found an agency's book of business to be a reliable and predictable source of cash flow. Before meeting with a lender, it is helpful to know what a financial institution with this specialized financing expertise will look for when considering your request.
Here is what the financial institution may ask:
Success - How successful have you been in the industry? Has the agency you wish to acquire been successful? Be prepared to provide at least three years of financial history for your agency and the agency you are acquiring as well your personal financial information. This information could include your balance sheets, income statements, cash flow statements, shareholders' equity statements, and tax returns.
Years in Business - Is this a new agency with a relatively new customer base, or have they been in business for many years with long-established customers? How many years have you served in the industry, and in what capacity? Are there other partners? If so, how long have they been in the industry, and what are their strengths? All this information can help determine how successful the acquisition will be.
Competition - How many competitors do they have in the local market? Why did this agency succeed compared to its competition? Is the agency you wish to acquire one of your current competitors, or is this a new market for you?
Purchase Price - What are you paying for the business, and what percent of the purchase price do you want to finance?
Loans - How large of a loan are you seeking? Do you have other existing loans? If so, how are they secured?
Equity - How much cash equity do you have to put into this acquisition?
Locations - How many locations does the agency have, and how large are the corresponding market sizes? Is there growth potential? Do they have a physical location, or is it a home office?
Employees - How many people are employed at the agency? Do they work from home or at a physical office location? Are they under contract? If not, what will prevent them from leaving the business once you acquire it?
Carriers - What carriers do you use? What carriers does the agency you are looking to buy used?
Book of Business - What is the breakdown of the agency's book of business between business and personal lines? What percent of the market do they currently enjoy? Is there a business valuation available on the book of business of your agency and the agency you are looking to buy?
Premiums - Do they collect premiums directly from customers, or do the customers send to a carrier?
Profit-Sharing -- What are the profit-sharing arrangements with the carrier?
It may seem daunting, but considering these questions before meeting with a financial institution will help make the process smoother - and hopefully more successful - for both you and the lender.