As an insurance agent, you spend your days helping clients understand how to prepare for a wide range of eventualities. As an agency owner, you recognize how smart financial management can help provide a strong foundation for your agency’s longevity – and your ongoing personal success.
Sometimes, part of your financial strategy will include the need for capital to address cash flow challenges or allow you to expand your agency. Although you’re probably already aware of what it takes to obtain credit, it’s a good idea to be reminded of the 5 Cs that are used to determine your creditworthiness.
Not only do these 5 Cs determine if you’ll be able to take out a loan when needed, they also have an impact on the interest rate you’re able to receive, which can lead to extensive savings over the long run. Let’s review them now.
Character
According to the dictionary, character is a “moral or ethical quality” or your “reputation.” In the realm of banking, character is defined by your past ability to repay your debts on-time and in-full. As an agency owner, your personal credit history is evaluated alongside your agency’s financials.
Because this is an essential part of the credit approval consideration – and is within your control – it’s a smart idea to check your credit report at least once a year so you can make sure the information is accurate. If there are any errors, move swiftly to correct them so that your credit report reflects your true character and payment history.
Capacity
This “C” focuses on how much you can afford to pay back based on a variety of factors. This includes the agency’s current debts, past cash flow, monthly expenses, income sources such as new business and renewal commissions and other measures of financial health. In addition to an assessment of your agency’s financial health, your lender will review your personal financial statements to ensure that you’re not overextended personally.
EBITDA is your Earnings Before Interest, Taxes, Depreciation and Amortization based on your agency’s income statement. This measurement helps a lender determine an agency’s profitability. Lenders compare debt to EBITDA by taking total debt divided by EBITDA and evaluate an agency’s ability to take on additional debt.
Your Debt Service Coverage (DSC) ratio is another metric lenders utilize to measure the ability to pay current debt obligations with available cash flow. The higher the ratio is, the easier it will be to gain access to lending opportunities. The ratio is generally calculated by taking excess cash flow (net operating income) divided by total debt payments, measured monthly or annually. Included in the total debt payments is interest and principal on existing debt plus the new loan you are contemplating.
Capital
Evaluating your capital includes a look at your personal and agency reserves in savings, checking, investments and property. Not only does this information speak to your liquidity and ability to make loan payments, it can also demonstrate how much “skin in the game” you have in your agency. Lenders need to know that you’re committed to the success and growth of your business – and therefore a reasonable borrowing risk.
Collateral
Assets pledged by a borrower (individual or agency) are the collateral for your loan. Typically for an insurance agency, the primary collateral is your commissions. Additional collateral on an agency loan could be your office building (if you own, rather than rent), office equipment, vehicles, and other viable assets.
Because an insurance agency business doesn’t typically have hard assets, a lender that works with agencies understands your commission-driven revenue streams that can serve as collateral. At First Mid, our team are experts in using this cashflow as collateral to structure your loan.
Conditions
The final “C” includes factors that are largely out of your control, but are related to the debt you’re planning to secure. Lenders look at overall economic conditions, the state of your industry (such as the impact of rising premiums) and other details that can positively or negatively affect the likelihood of the loan being fully paid back.
Being aware of both the national and local economy, industry specific headlines that impact you and having a solid business plan to adapt can help you prepare for this aspect of a creditworthiness assessment.
Take Action Today
As an agency owner, your days are filled with immediate demands and time-sensitive tasks. However, it’s important to think about the big picture and your long-term goals, both personally and professionally. There are two essential things you can do to stay prepared for any future lending needs.
First, remember that as an insurance agency owner, your creditworthiness isn’t based on just the agency’s financial health. Your personal finances play a critical role in your ability to take on agency loans as it’s a demonstration of your ability to manage your money well and speaks to your character.
Second, building a relationship with a lender before you need credit can help pave the way for a smoother application and approval process. Not only will you have an actual person you can turn to, you’ll be able to gain early insights into making smart financial decisions long before an infusion of cash is needed.
If you want to learn more or plan ahead for future loan needs, please email or call one of our agency lenders today.
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