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Published By Janet Gershen-Siegel at February 5th, 2021
Did you know that you can fund the purchase of an insurance agency with book of business financing? But just what is this form of funding?
Book of business is a professional’s list of accounts or clients. Finance and legal professionals are likely to use this term, as are insurance agents. In an ideal situation, an insurance agent is continually adding to his or her book of business.
Your book of business should include all customers/clients you have worked with in the past. As you get a new client, add them and their information to your book of business. Your book of business is ideally ever-changing and evolving. It should have new information added about your clients as your relationship progresses.
The kind of detail a book of business contains might include revenue generated from this client, their basic demographics like age and occupation, referrals (if any), and their potential future needs. See thebalancecareers.com/book-of-business-1287034.
Beyond just maintaining a connection with your clientele, you can also use a book of business as a place to store important details about a client. Business relationships are valuable. The best client acquisition is just to add to the business you do with a client, versus getting a new client. So keep your relationship relevant and fresh by keeping up to date information on your clientele.
Insurance agents can get low-interest, long-term financing, by using renewable commissions as collateral. This program is the best program available for insurance agents, when it comes to approval requirements and approval terms. But agents from State Farm are not eligible.
Traditional lenders, like major banks, will tend to look for hard, tangible collateral. It is rare for an independent insurance agency to have enough hard collateral to get a large enough loan to buy an existing book of business. Hence, you will have to find a lender specializing in financing insurance businesses, which understands their inner workings.
Have the insurance book of business valued by a professional company. There are many companies which only conduct business valuations. These valuations 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 tends to be a multiple, often 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 regarding the book of business you plan to purchase. You will also have to show you have 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 buying the book. It also needs to have a clear description of how you intend to maximize the profit potential of your new asset.
Search for lenders. The chance that your financing request will be approved by traditional banks or lenders is extremely small. Narrow your search to specific specialized lenders that work just with insurance agency owners. These niche lenders will understand the potential power of a large insurance book of business. And they will recognize that book as an asset to secure your loan.
Consider and evaluate loan offers. After you have provided all requested information to a specialized insurance industry lender or broker, you will get multiple loan offers. Check 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.
Differing valuations will have a significant impact on the amount of the loan, internal fees, and repayment terms.
It is a good idea to get more than one business valuation done. 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.
Lenders should look at mix of business, cash flow, and efficiency of operations. This is to see how likely that agency can continue to generate consistent commissions from their existing client base.
An agency’s mix of business is often just as important as its volume of business. The more diverse the book, across agency clients, business lines and insurance carriers, the more favorably specialized lenders will view that book. Often, stronger agencies are those not overly dependent on one carrier or a small group of clients.
Insurance agencies often have more reliable cash flows than other mid-sized businesses. This is because they don’t have to ‘reinvent’ themselves every year. They deliver a service that individual and business customers depend on year in, year out. Plus, they can generate predictable cash flow from ongoing commission revenue.
The key to maximizing the value of an independent agency is to efficiently reinvest in the business while minimizing unneeded expenses. Lenders who understand the insurance industry will want to lend to agencies which run their operations efficiently. Those are the agencies that will truly be able to command a premium, when it comes time for valuation and sale, and evaluating a book of business for collateral purposes.
Keep in mind, your insurance book of business will be the collateral securing your new loan. If you default on your loan, you risk losing all future commissions on that book of business. That’s how valuable a book of business truly is.
All you truly need to qualify is a book of business of renewable commissions. You can even use the book of business for an independent insurance agency you are buying as collateral for approval. This means your personal credit can be average and you can still get an approval. Lenders are mainly looking to make sure you have a viable book of renewable commissions for your insurance agency.
Your business will not need to be perfect. You do not need to supply the extensive documentation that lenders typically demand. You can get approved, with just a quick review of your credit and renewable commission breakdown.
Don’t want to put your book of business on the line? Are you an agent for State Farm? Not getting a high enough valuation to cover a loan or buying an independent insurance agency? Not to worry, here’s an excellent alternative if you’ve got good personal credit.
You can get a line of credit for up to $150,000. This is no doc financing. Pay 0% for up to 18 months. It even helps build business credit because your payments are reported. A 680 or better FICO required. See my.creditsuite.com/qualifier-form.
This program is designed to help clients get funding based strictly on personal credit quality. Our lenders will not ask for financials, bank statements, business plans, resumes, or any of the other burdensome document requests that most conventional lenders demand.
Our lenders will review your credit report. They want to ensure there are no derogatory items on the report. To be approved you shouldn’t have any open collections, late payments, tax liens, judgments, or other types of derogatory items reported.
To qualify you should also have fewer than 5 inquiries on your credit report, within the last 6 months. You should have established credit. This includes open revolving accounts now reported on your credit report, with balances below 40% of your limits. Applying for financing can be a big step. Let’s take it together.
Book of business financing can be a viable means of leveraging a vital asset, to buy an agency or get financing to improve one. A book of business is valuable but varying types of valuations may provide dissimilar results. Book of business financing is not available to State Farm agents. Fortunately, there’s an alternative out there.
Our credit line hybrid is a great alternative to book of business financing. It is an excellent way to build initial business credit. Your payments are reported. And you won’t have to provide extensive documentation.