Gaining access to capital is difficult for small businesses, new businesses and particularly service businesses with assets that are primarily intellectual—and that includes insurance agencies. Read Live Oak Bank’s white paper to learn more about your options.
Gaining access to capital is difficult for small businesses, new businesses and particularly service businesses with assets that are primarily intellectual—and that includes insurance agencies.
These businesses need to leverage their ability to generate consistent cash flow to gain access to capital. Recently, the task has become a little easier, as the business community developed a better understanding of the value of intellectual capital and the sustainability of insurance agencies’ cash flow.
Financing options include:
Seller financing. Agency owners often find that in order to close a business sale, they must finance at least part of the transaction themselves. Typically, this includes a percentage of the purchase price as a down payment, and paying the rest back over time with interest.
Small Business Administration (SBA) loans. An agent who applies for an SBA loan does not borrow from the government directly. Instead, the SBA guarantees bank loans to small businesses that meet the SBA’s criteria. These criteria vary by industry, but are notably more lenient than a bank’s typical loan standards, which fits with the SBA’s mission to expand business ownership and create jobs. Terms are generous: up to 10 years for a business loan with no prepayment penalty.
Bank loans. Banks are the primary source of credit and the first lending institution that comes to mind for most borrowers. Here, however, a business based on intellectual capital that lacks tangible assets may have trouble qualifying for a loan. Banks want their business loans to be collateralized, and an agency’s laptops and file cabinets typically won’t suffice.
Mezzanine capital. Agencies seeking to borrow at least $2 million for external acquisitions may qualify for mezzanine capital, which is a type of debt best used by firms that are growing rapidly. Mezzanine debt is subordinated debt, which means the lender’s rights to the borrower’s money come after they pay off other more senior loans. Generally, mezzanine loans are expensive and terminate with a balloon payment after about seven years, which can be stressful for the borrower.
Download Live Oak Bank’s complete white paper to learn more.
