Monday, December 21, 2009

How to Finance an Insurance Book of Business

If you need funding to purchase a new insurance agency, or expand an existing one, finding appropriate financing sources may be challenging. Perhaps one of the most important factors to commercial lenders is the existence of significant collateral.

Unfortunately, traditional lenders, such as major banking institutions, look for hard, tangible collateral. It is rare for an insurance agency to possess enough hard collateral to secure a large enough loan to purchase an existing book of business. For this reason, you will have to find a lender who specializes in financing insurance businesses and understands their inner workings.

Have the insurance book of business valued by a professional company. Many companies exist whose sole function is to conduct business valuations that help determine an appropriate sale price for a particular asset or organization.

In the insurance industry, the average sale price for a book of business is typically a multiple, between two and four, of the annual earnings.

Create a business plan. You will need to demonstrate to the lender that you have legitimate intentions with regard to the book of business you plan to purchase, as well as the knowledge and experience to profitably run an insurance agency.

A well-written business plan should address any and all potential challenges you may face after the purchase of the book, plus a clear description of how you intend to maximize the profit potential of your new asset.

Search for lenders. The likelihood that your financing request will be approved by traditional banks or lenders is extremely small. You should narrow your search to specific specialized lenders who work exclusively with insurance agency owners. These niche lenders will understand the potential power of a large insurance book of business and will recognize that book as an asset to secure your loan.

Premium Finance Associates states, “We look at renewal income as a reliable asset… When underwritten correctly, renewals can be as strong an asset as property.” According to Oak Street Funding, “The first step is our high-level review of your insurance policies that will be used as collateral for your loan.”

Evaluate loan offers. After you have provided your information and all requested information to a specialized insurance industry lender or broker, you will receive multiple loan offers. Examine each one to determine which is most appropriate for your situation, timeline, and available budget.

Each lender will place a different value on the book of business to be used as collateral, which will have a significant impact on the amount of the loan, the internal fees, and the repayment terms.

Tips & Warnings

Have more than one business valuation conducted. Since each company uses slightly different standards to evaluate an insurance book of business, the end result from each valuation will vary.

Lenders will rely heavily on the valuation to determine the relative strength of the book of business, so the best possible valuation is necessary.

Your insurance book of business will be the collateral securing your new loan. In the event that you default on your loan, you risk losing all future commissions on that book of business.

References Financing the Future of the Independent Agency System
Oak Street Funding: FAQ
Small Business Administration: Write a Business Plan

Article originally published on eHow Money (12/21/2009)

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