What is a Lender Thinking When I Apply for a Loan?


So you’re ready and excited to purchase an insurance agency. You eagerly call a lender to inquire about perpetuation or acquisition financing. The phone call goes well (you think), but a few silent days pass. Is the lender not interested? Will I be approved for a loan? I wish I knew what the lender is thinking…

Well, certainly not all lenders think the same, and every loan’s credit criteria makes each situation separate and distinct. However, understanding the thought process and credit focus of a lender before exploring financing can help ensure success. Here are a few of the common credit characteristics that a lender focuses on when reviewing an insurance agency loan.

Factors that help the lender make the decision

1. A lender will want to know who they are doing business with, as well as the purpose and nature of the transaction. Have a well thought-out business plan and be ready to articulate your plan. Put yourself in the lender’s position; would you loan a person money with the business plan you present? Be ready to share: who your competitors are, what is your background, what is your customer mix, why the current owner is selling, how can you run the agency more efficiently or profitably than the prior owner, and what is your strategy to grow the book. This type of information should be included in your business plan
and explained to your lender.

2. This is a credit decision, so expect that lenders will analyze the current and expected performance strength of the company. This analysis is conducted to ensure the ability to repay the proposed debt. Therefore, when speaking to your lender, be prepared to speak to the financial performance of your agency. Be proud of the company’s successes, and be honest about any performance hiccups. Make it apparent that you understand the performance of the company and educate your lender accordingly. Remember, financial performance dips or hiccups happen to everyone – but having a thoughtful game plan for its resolution will separate you, and impress your lender.

3. Make sure your lender understands your timeline and provides feedback accordingly — this is extremely important. Don’t waste time on a financial solution which won’t meet your timeline.

Character of the Borrower

1. Lenders carry the burden of the inherent credit risk of repayment,and therefore they tend to target only individuals of sound character and good reputation. Expect that a lender will conduct thorough background investigations, including researching character references and credit references. Be proactive, and clean up any personal credit issues if possible. Most importantly, be up front and provide full disclosure regarding any issues that cannot be reconciled. Your lender is
going to find out anyway, so don’t keep any secrets. Surprises are a lender’s biggest nightmare.

2. “But I have all of this collateral” … and that may be true. Lenders hear this on a daily basis. Contrary to popular belief, collateral is not viewed as the primary source of repayment; lenders give paramount consideration to the ability and willingness of the borrower to repay with cash flow. The liquidation of collateral is a lender’s last resort.

3. Do you have outside investments that lose money? If so, a lender will want to understand those investments. This is not because a lender enjoys being nosey or snooping into your affairs; no lender wants to loan money to a company that is a cash cow only for those profits to be sucked into a losing outside affiliate. Thus, understand and be prepared to speak to your global financial affairs.

4. Don’t be offended if a Personal Guarantee is required. Personal Guarantees are standard for loans structured around intangible assets – or insurance books of business.

Assessing the Customer’s Business

1. “I really trust my seller – I’m sure everything is ok.” And it may be. However, don’t go by your gut or allow emotions to be your guide – always perform the appropriate due diligence. Review commission statements, banks statements, study the industry and all pertinent financial information.

2. “I’m getting a great deal.” Are you? Be prepared to prove it. The best way to verify your purchase price is through a formal, third-party business valuation. Most lenders will want the support of an experienced, certified third party business valuation firm to consider most agencies for financing. The third party expert will prepare an independent Business Valuation from the agency’s operational and financial information. The Valuation will normally include the following analysis and comment sections:

a. To what extent does the agency’s growth reflect the insurance industry cycle?

b. Representing large, well-known insurance companies is commendable, but do recent loss ratio trends within the agency or marketplace signal trouble?

c. Are increasing profits sustainable?

3. Protect Yourself – A good lender can act as an additional line of defense by ensuring that you’re protected. They will make sure that well written agreements exist such as:

a. Employment Agreements. Agreements between an agency and its employees, and independent contractors (especially an agency’s originators/producers). Such written agreements that delineate conduct in the event of termination of the relationship increase the value of the agency; and the lack thereof tends to diminish an agency’s potential value.

b. Non-Piracy / Non-Competition agreements. If no agreement is in place that addresses the ownership of client relationships and the duration of time when parties may solicit and accept business from those clients — it creates a situation where ownership rights are questionable. This can seriously affect the value of an agency.

This information should enhance your ability to successfully review opportunities and obtain financing to complete an agency perpetuation or acquisition. At Crestmark Bank, our Insurance Agency Finance Division is devoted to creating custom-tailored finance solutions to help ensure your goals are successful. We pride ourselves on being insurance experts capable of providing more than just dollars — we strive to be your partner. If you or your agency are in need of a capital solution, contact us today!








Christopher Soupal