How Much Can I Borrow?

Capital is essential for the growth of any business. There is no doubt that investing in your business offers great returns. First Mid Bank & Trust Agency Finance offers lending opportunities to not only meet your growth objectives but to exceed them.

Types of Capital

Generally there are 3 types of capital that exist; Senior Debt, Subordinated or Mezzanine Debt and Equity. Senior Debt is any debt that takes priority over other debt owed and is normally secured by collateral (any assets within the business). Mezzanine Debt is frequently associated with acquisitions and buyouts. This particular type of capital may have equity instruments (usually warrants) associated with it, which increase the value of the subordinated debt. Equity financing is distinct from debt financing related to ownership and control. Equity financing allows a business owner to sell shares of their company. This therefore allows outsiders to gain an ownership stake in the business, which could affect daily operations. Debt financing normally allows the owner to retain full operating control of the business, without changing the ownership or structure.

Depending on the lifecycle stage of your agency, your capital needs may vary. If you are new, you may be looking for growth capital. If it has been difficult to grow, you may be in need of marketing capital. Your need for capital is dependent on your agency’s needs, and how much you can borrow is very specific to your agency’s characteristics and financial performance. There are a few factors specific to insurance agencies that can help guide you in determining your debt capacity or the amount you can borrow. These include:

  • Insurance product types
  • Retention ratios
  • Personal and/or business credit scores
  • Debt service coverage
  • Debt to EBITDA
  • Ratio of your desired loan amount to annual commissions

Products, Retention, and Credit Score

The product types, retention ratios, and credit scores are qualitative factors that can impact the amount a lender is willing to lend to an insurance agency. Product types with longer, more stable renewal income may allow lenders to advance more against the commissions. Higher credit scores and retention in the insurance book are good indicators of stability of the borrower and related insurance commissions. It’s a good idea to request a copy of your credit report using one of the credit bureaus ahead of applying for a loan so that you understand what your credit score range is and determine if there are any errors on your credit report that may need to be fixed.

Debt Service Coverage

Your Debt Service Coverage (DSC) ratio is a good benchmark to work from in determining the ratio of cash flow to debt payments. DSC measures 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. Lenders vary on their requirements for DSC. Some lenders require a DSC ratio of at least 1.2 while others may require a DSC ratio of at least 1.5.


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. Again lenders vary on their requirements for the ratio of debt to EBITDA. Some lenders require that debt to EBITDA be no more than 3.5 while others may require a ratio of no more than 5.0.

Multiple of Annual Commission Revenue

Lenders have differing capacity limits for different insurance product lines. Products that have a more stable, longer vested commission value may allow a lender to loan more when compared to products that are more price sensitive and have lower retention rates or commission values.

Insurance Agents should consider which types of capital will work for them based on their present and future needs. All capital is not created equally, so choosing wisely for your agency is of utmost importance. The information contained in this article is not intended to fully encompass the requirements that a lender may have for an insurance agency loan but is intended to help guide you in understanding some of the key components that may go into a lenders decision.