As an agency owner, you know the importance of maintaining balance — whether it’s managing your time, hiring enough (but not too much) staff, prospecting versus servicing clients, choosing an appropriate level of investment into business growth, and deciding when to take growth steps.
However, there can be a cost of waiting too long for certain aspects of your agency. We’ll look at two areas where delaying action can be costly — refinancing and acquisitions.
Playing the Waiting Game with Interest Rates
Although considering interest rates is an important part of any financing or refinancing decision, it’s easy to become paralyzed into inaction by trying to predict the ideal time to get a business loan. These situations could be appropriate for a refinance:
- If you’re focused on growth, waiting for that sweet spot of the lowest rate can impede your progress. If you need to increase monthly cash flow to support marketing efforts or technology upgrades, then refinancing to a lower rate could be a smart step to take. Often, reinvesting that additional monthly cash flow after a refinance will produce more return for your agency versus the potential for further rate cuts.
- If you are carrying loans with double digit interest rates, consider looking at the potential savings by refinancing. You could be paying higher rates due to a previously low credit score or higher leverage that has since improved. If you’ve been in your loan for a few years, you’ve reduced the principal which likely puts you in a less leveraged position. You may be able to reap the benefits of reduced interest paid over the life of the loan. In addition, lower monthly payments can free up funds to be used for agency improvements or growth activities such as marketing.
- If you’re looking for short-term relief on interest costs and monthly payments, refinancing into a short-term adjustable rate note that converts to a fixed rate could allow you to take advantage of immediate cash flow savings, while also providing the benefit of any additional rate reductions if they occur.
Each agency’s structure, cash flow situation, revenue goals and debt loads vary. Because you’re focused on the day-to-day operation of your agency, sometimes it can be helpful to take a step back and seek a fresh perspective on your finances. We’re here to provide that third-party viewpoint and will work with you on ways to optimize your debt.
Choosing the Right Time for an Acquisition
If you’ve been thinking about an agency or book acquisition, but you’re hesitant because you’re hoping that interest rates will drop, consider these factors:
This section’s headline may lead you to believe that there is a “right” time to begin the process of seeking out and pursuing an acquisition. Like many other situations in business, there is often more than one “right” time or solution. The first step is to determine what the opportunity cost of waiting is. Calculate the operating profit impact of an acquisition based on the specific agency or agencies you’ve identified. Based on how much you will need to finance for the acquisition, calculate the interest cost of financing based on today’s rate. Subtract the financing costs from the operating profit to determine the year 1 opportunity cost if you don’t acquire now.
Compare that opportunity cost to the potential interest savings of waiting until interest rates potentially drop. For every $100,000 of debt you need to finance the acquisition, a 50 basis point reduction in rate is a savings of $500 per year in interest, while a 100 basis point reduction is a $1,000 annual interest savings. This amount of savings might not be worth waiting for if there’s an ideal agency available.
Although the interest rate environment is likely to continue fluctuating, agencies are in high demand. More qualified buyers may be entering the market as the economic landscape improves, so you risk having increased buyer competition.
Your challenge is to determine if it’s worth bypassing a strong target agency that’s ready to sell to you now while you wait to save a few thousand dollars in interest later.
Moving Forward
Every insurance agency owner faces pivotal moments throughout the journey of running their business. Making decisions about refinancing and acquisitions are two of the bigger ones you’ll face. Our consultative staff has been providing specialized financing products for insurance agents since 2003. Let us help you analyze your situation.
Contact our team at 877-894-2785 or by email at agencyfinance@firstmid.com. We are ready to help you take the next steps in building your future.
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