Rising Rates and Your Insurance Agency

A Good Offense Beats A Good Defense When Tackling Rising Rates and Recession Fears

Struggling on what to do with all this talk of inflation, rising interest rates and looming risk of recession?   First, let us share some perspective.   What the media reports as a substantial increase in interest rates often does not translate into giant leaps in debt service costs. Keep in mind that a 50 basis point (0.50%) rate increase costs an additional $420 per month for every $1,000,000 in debt.  Sure, that can be painful, but not crippling to an agency.   In fact, if your debt is already a fixed rate, the recent increase in rates will not have any direct impact on your debt service.

So, what is the greatest risk? Excluding any impact of the economy on your customer base for the moment, the inability to renew existing or obtain additional loans to achieve your business plan and growth goals is much more relevant. The fear of recession and higher interest rates causes most lenders to tighten underwriting standards and/or lend to only those segments that are viewed as safe and bring tangible collateral.

Are you helpless and a victim to the broader economy? You do not have to be and here are a few things for you to consider so that you have the borrowing capacity to navigate this uncertain economy.

Identify Your Financial Needs to Achieve Your Business Plan

Know your current financial health. Understanding your balance sheet, income statement and cash flow is a great place to start. Pressure test your business. What if rates continue to rise? Are you able to cover your credit and loan obligations if payments rise too? Running through scenarios to ensure your business can weather any sort of change is always a good idea. With inflation and interest rate hikes, now is a great time to take stock of your business’s financial situation and assess what other changes might make sense for your business during this time. It will be impossible to run through all potential scenarios but think through those that could have the largest impact to your business and make sure you are prepared.

Identify what future needs you may have.  It is common for businesses to become “short-sighted” or solely focused on the day-to-day business. If you were thinking about growing through acquisition, tough economic times can create opportunistic buying opportunities as agents decide to retire or exit the segment rather than push through.

Organize Your Finances and Gather Materials

Now is not the time to show up for a loan request with the proverbial shoe-box full of receipts and W-2’s. In addition to having timely and accurate financial statements and tax returns, gather information regarding retention, growth of households, cross-sell/bundling, and other information that highlights the strength of your book.

Find an Expert Familiar with Your Industry

When economic times are uncertain, the importance of finding a lender that is both knowledgeable of the insurance industry and has desires to grow that segment of the lender’s portfolio becomes critical.   As mentioned earlier, lenders seek “safe-havens” that they know and that have physical collateral during tough times. Unfortunately, lending to agents is not mainstream and does not provide tangible collateral, so familiarity of the industry is key to unlocking your lending capacity. 

Consider a Line of Credit

Consider applying for a line of credit even if you do not have immediate plans to use it, particularly if you are establishing a new relationship with a lender.  In addition to having “rainy day” access to funding, the line of credit will allow you to gain some history and familiarity between you and your lender.   That familiarity provides an opportunity to dialogue on your longer-term growth objectives and lays the foundation for obtaining the financing for those needs.

The definition of “insure” is to secure or protect someone against a possible contingency which is what you do every day. So do the same for your business by ensuring that you have a backup plan that meets your objectives should your first alternative for growth not work. Remember it’s never too early to start planning.

At First Mid Agency Finance, we understand the value of your book, have been lending to agents since 2008 and continue to seek meaningful lending relationships in this space.   Should you have a current need, need financial advice, or lay the foundation for a future lending relationship, we are here to assist you.

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