Consider as an analogy investing for retirement. An agency owner can invest in certificates of deposit and be assured of a positive return if held to maturity. However, in doing so and avoiding the risk of other investments such as stocks and bonds, the owner gives up the opportunity to achieve greater growth of the retirement portfolio. Similarly, an independent agency that sees opportunities but does not seek outside capital is limited in trying to acquire other agencies or implementing more efficient technology to improve the customer experience.

Key questions to ask lenders

Independent insurance agencies operate differently from businesses in other sectors. Banks with a generic, one-size-fits-all approach can frustrate owners and potentially miss important risk factors or growth opportunities. That is why it is critical for agency owners to ask the right questions and recognize when the answers raise red flags.

What collateral will be required? Will personal guarantees, liens on LLC or S Corp ownership, C Corp stock, or assignments of life insurance policies be expected?
How will financial statements be handled? Must they be CPA-prepared? How often will they be reviewed?
Does the bank understand how to interpret carrier premium reports?
Does the bank understand how independent agencies operate? Can they speak to cash-flow cycles, contingency income, premium trust accounts, and other operational intricacies?
Is there flexibility in loan structure? What criteria determine loan terms and repayment schedules? Are these adjusted for industry-specific dynamics?
How are varying financial positions among co-owners addressed? If one partner has weaker personal finances, how does that impact the bank's lending criteria?
Will the bank help interpret loan covenants? Can they explain terms like debt service coverage or trust ratio requirements, and help the agency plan for contingencies?
Can the bank advise on Small Business Administration (SBA) vs. conventional loans? Do they understand which loan suits the agency's current situation and future goals?
What is the bank's view on succession planning? Will they assess the management team's ability to sustain operations if a principal exits unexpectedly?

As agency owners or principals evaluate the responses to these questions, they should consider whether the lender truly understands the agency's business model and whether the owners are comfortable with the lender as a long-term partner. Does the lender have a history of working with agencies like this one? Can the lender provide insight that goes beyond the numbers, the same way the agency does for its own clients?

Special Reports /

Agency owners: Ask these questions before borrowing money

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