What Do Rising Interest Rates Mean for Your Agency’s Growth?

The gross domestic product  increased 3.4% and 2.6% in the third and fourth quarters of 2018, respectively, according to the Bureau of Economic Analysis.

The early stages of a rising interest rate environment are a good indication that the economy is strong and growing—and when consumers have more money to spend, it can contribute to growth for your agency.

Consumers who have more disposable cash will likely spend more on cars and upgrading their homes, by either purchasing a larger, newer home or investing in improvements and expansion of existing property. All of that leads to a greater need for personal lines insurance.

A growing economy also means businesses are growing. As businesses grow and expand, their need for commercial insurance can contribute to growth for your agency’s commercial lines. Meanwhile, these businesses may also have greater needs for health insurance benefits as they expand their staff, leading to growth for agencies who specialize in life-health products.

Capitalizing on Economic Growth

Organic growth may be easier to facilitate in an increasing rate environment. But many operations will be limited in their growth by existing resources, and eventually the capacity of existing staff and operations hits a maximum.

When an agency reaches its capacity, continued organic growth may require working capital to hire additional staff, expand office space or add technology to improve operating efficiency, thus leading to higher demand for credit to support that growth.

Another way to create growth within your agency is through acquisitions. Acquiring another book or office location can accelerate growth faster than organic growth and enable you to combine operational tasks to gain capacity for additional growth.

Taking on Debt

In a rising interest rate environment, the cost of debt is higher. How do you know if taking on debt to facilitate growth makes sense?

Using debt as a strategic tool can be healthy for your agency, but first you must ensure that you have a definable purpose for your debt, whether that’s hiring new sales or operational staff, investing in a new agency management system, building out or leasing new office space, or acquiring another book or agency.

Quantify the benefit you will derive from the investment and compare that to the cost to borrow. If your return on the investment is greater than the cost to borrow, then taking on debt may be the right choice for you. Reach out to lenders to discuss your objectives, learn about their process, and find the best option for your specific needs.

The definition of “insure” is to secure or protect someone against a possible contingency. That’s what you do every day. Do the same for your business by ensuring you have a backup plan that meets your objectives should your first alternative for growth not work. Remember: It’s never too early to start planning.

Melanie Otto, a senior vice president and director of agency finance at Providence Bank, specializes in providing financing to insurance agents.