How to Choose the Best Loan for Your Insurance Agency

As an insurance agency, there are a lot of reasons why business owners might need an insurance agency loan. For example, you might want to expand and open a new location, hire new insurance agents, new producers, cover short-term overhead costs, or finance a competitor agency acquisition.

As an insurance agency, the types of loans your insurance business qualifies for are limited. For example, life insurance companies are not eligible for loans through the Paycheck Protection Program.

Additionally, many insurance agencies work off commissions and might be considered high-risk. This can make the loan process harder and generally more challenging to secure financing.

Let’s look at some of the loan options available for businesses in the insurance industry and determine the best insurance agency loans for your agency.

Criteria to determine which insurance agency loan is right for you

Let’s review the criteria you should use in evaluating loan options and determining which loan is the best fit for your business. Some factors you’ll want to consider when choosing a loan for your insurance agency include:

• Interest rates. Loans with lower interest rates can save you tens of thousands of dollars over your loan term. When looking at business financing options for your insurance agency, make sure you’re comparing to find competitive interest rates.
• Repayment term. Your monthly budget and how quickly you can repay your loan will play a large role in determining which loan is best for your independent insurance agency cash flow. Generally, longer repayment terms come with a lower monthly price tag, but you’ll pay more in interest over time. Term loans with shorter repayment terms will have higher monthly payments, but you’ll save money in the long term.
• Eligibility criteria. Before you decide on the right loan for your insurance agency, you need to make sure you qualify for that loan. Research the eligibility criteria (both in terms of credit history/credit score and industry eligibility) and confirm you qualify before applying for financing.
• Purpose of the loan. There’s no one-size-fits-all solution for choosing a business loan. The best financing for your insurance agency is going to depend on your situation and the purpose of the loan. For example, if you need short-term funding to cover this month’s overhead expenses, the best loan option might be different than if you were looking to finance a large-scale expansion.
• fees. Some business loans appear to have competitive interest rates and repayment terms, but when you factor in the loan’s exorbitant fees, it no longer seems attractive. Make sure you read the fine print and are aware of any fees you might incur over the course of the loan. For example, signing fees, late fees, or early repayment fees.

Weighing these options can help you better evaluate the financing options available for your insurance agency and, ultimately, decide which is the best insurance agency financing option for your business.

Insurance agency loans to consider

Now that you understand how to evaluate and choose the best loan for your insurance agency, let’s look at the different financing options available for insurance companies:

SBA Loans

The United States Small Business Administration (SBA) offers a variety of lending options to small businesses. A popular choice is the SBA 7(a) loans, which can be a viable type of insurance agency loan for insurance companies.

Insurance agencies can work directly with an SBA lender to apply for loans anywhere between $5000 and $5 million. While there can be significant paperwork with securing funding through the SBA, these loans typically offer more favorable terms for small businesses. For example, lower interest rates (interest rates for SBA 7(a) loans start at 6.75%) and longer repayment terms (between 5 and 25 years).

Traditional bank loans

Securing business loans through a traditional bank, community bank, or credit union can be challenging for an insurance agency. They require documentation including tax documents, tax returns, and bank account statements to verify the financial state of your insurance agency.

Even if your business is doing well, the nature of insurance may cause the bank to put you into the “high-risk” category. This can impact the terms of your loan such as a higher interest rate and require a stronger balance sheet.

Before you apply for a loan with a traditional lender, make sure you understand their eligibility requirements and whether they’re willing to work with insurance companies.

Small business loans from alternative lenders

Alternative financing providers can be a great option for securing the financing you need for your insurance agency.

Alternative lenders offer small business loans with easy approval. The application process often includes shorter approval cycles, less paperwork, and lower credit standards—and money is often transferred significantly faster, sometimes in as little as one day.

Loans from alternative lenders can sometimes have higher interest rates, lower borrowing thresholds (alternative lender financing typically caps out at $250,000), and shorter repayment terms (anywhere between 3 and 18 months). Keep that in mind when taking on this kind of business debt.

Book of business loans

Book of business financing leverages your insurance agency’s book of business. In other words, your future commissions are used as collateral for an insurance agency loan. If you’re looking to buy an existing insurance agency, you can also use that book of business as collateral for a loan.

While leveraging your book of business could put your future commissions at risk, it can help you qualify for better terms and a higher loan amount. Which can help to grow and expand your insurance agency.

If you’re thinking about applying for book of business financing, you may want to seek out a lender who specializes in the insurance industry and can properly evaluate the value of your book of business. A traditional lender may not view the book of business as adequate collateral and may either deny your loan or approve the loan with less-than-favorable terms.

Startup loans

If you’re launching a new insurance agency, you’re going to need working capital to get started. Launching an agency business often requires significant upfront costs. For example, many large insurance companies require insurance brokers to have at least $100,000 in capital before they start an agency.

Quick and easy business loans targeted towards startups and new businesses can be a great way to secure that funding and get your business off the ground. The interest rates, repayment terms, loan amount, and eligibility requirements for startup funding will depend on both the lender and your credit worthiness. Research the different startup loans available to find the option that makes the most sense for your insurance agency.

Acquisition Loans

Additional financing for insurance agents to consider are acquisition loans, a special type of insurance agency loan. Looking to expand your insurance agency by acquiring another book of business, an entire agency, or a partner buyout? An acquisition loan can provide the funding. These loans are designed to help you purchase an existing insurance agency or a block of policies from another agent.

Acquisition loans can be structured in various ways, including seller financing, bank loans, or a combination of both. Seller financing involves the seller of the agency or book of business providing part or all of the financing, often with favorable terms. Bank loans, on the other hand, may require more stringent qualification criteria and may involve higher interest rates.

When considering an acquisition loan, evaluate the financial health of the agency or book of business you're acquiring. Factors such as client retention rates, policy types, and commission structures are essential to consider. Talk with underwriting to get a sense of the quality of the book of business. Working with a lender experienced in insurance agency acquisitions can help you navigate the process and secure favorable terms.

Final Thoughts

Navigating financing options for insurance agencies can be challenging. But now that you know some of the different loans available to insurance companies—and how to evaluate them—you’re armed with the information you need to choose the best loan for your insurance agency.

FAQs About Insurance Agency Loans

What are the different types of loans available for insurance agencies?

Insurance agencies have several loan options, including SBA loans, traditional bank loans, alternative lender loans, lines of credit, book of business loans, startup loans, and acquisition loans.

What are the eligibility requirements for an insurance agency loan?

Eligibility requirements vary depending on the lender and loan type. Traditional bank loans often require strong financial documentation and may categorize insurance agencies as high-risk. Alternative lenders may have less stringent requirements, while SBA loans have specific criteria for small businesses.

How can I use an acquisition loan for my insurance agency?

Acquisition loans are designed to help insurance agencies expand by acquiring another book of business, an entire agency, or buying out a partner. These loans can be structured through seller financing, bank loans, or a combination of both.

What factors should I consider when choosing a loan for my insurance agency?

A: Consider factors such as interest rates, repayment terms, eligibility criteria, the purpose of the loan, and associated fees. Evaluate your specific needs and financial situation to determine the best loan option.

What is a book of business loan, and how does it work?

A book of business loan leverages your agency's future commissions as collateral. This can help you qualify for better loan terms and a higher loan amount, but it also puts your future commissions at risk.

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