The first question typically asked regarding a loan is what’s the interest rate. This question is more easily answered in a mortgage situation where lenders quote rates with very little information. However, interest rates on agency loans can vary from agent to agent depending on many factors. Below we have outlined some of those factors so you can better understand what is taken into consideration when determining your interest rate.
Strength of cash flow
One of the first things our team looks at is the agency’s ability to service debt or their debt service coverage. Working alongside agents, we examine the agency’s cash flow available to pay back the debt owed. Generally, this is done by comparing monthly excess cash flow after expenses to the new monthly debt payment. The stronger the debt service coverage, the more likely it is to reduce your interest rate.
Term on loan
The length of time on your loan, or the loan term, is also a determinant on the interest rate. As the term increases, the interest rate will generally increase. Your loan’s term can also depend on your need. For example, an acquisition typically requires a longer loan term, whereas a shorter term is possible for a working capital request.
Credit score
As with any lending opportunity, credit score can be a crucial determinant in interest rate. As a lender analyzes the financials of your agency, they will also examine the credit score of the individual agency owner(s). Obviously, a better personal credit profile helps to keep the rate lower.
Borrower experience in the industry
The amount of time an agent has been in the insurance industry is also considered as a factor for the interest rate. However, this does not necessarily mean that an agent that has been in the industry for 10-15+ years will receive a lower interest rate than someone who may only have 1-5 years of industry experience. Being a proven operator and owner lowers the risk which may have a positive impact on the interest rate.
Collateral – strength of the book
Specialty lenders in the insurance market generally will use the agency’s book of business as collateral for a loan. Your small community bank won’t likely understand how to use the book and its future commissions as collateral. Specialty lenders like First Mid Bank & Trust Agency Finance understands how to value your book. An agency’s retention and loss rates, carrier mix and concentration risk are all factors used in determining a value for collateral. Additionally, the commission structure and related bonuses are a consideration in valuing the book as collateral. If the loan amount is a small portion of the value of the book, the rate may be lower. Loans that are a greater percentage of the value of the book tend to have a higher interest rate because the perceived risk is higher.
At First Mid Bank & Trust Agency Finance, we understand that every agency is different whether captive or independent. Therefore, we take careful consideration of all of these factors to get the best interest rate for our customers. To learn more about our lending opportunities and products offered call us at 877.894.2785 or request a quote online to get the lending process started.
