Agency Financial Management
Financing sooner or later?
Now may be the time to borrow as interest rates are certain to rise
By Rick Dennen
There's little doubt that our economy is recovering from the recession and there is growing optimism about the future. Along with the good news, however, comes the realization that interest rates typically increase as an economy strengthens. For insurance agency business owners who are considering financing for growth, acquisitions, or successions strategies, now's the time to evaluate if you should take on debt in the near future or wait.
While the capital outlook for 2014 is upbeat, insurance agents and brokers can anticipate that borrowing capital may be more costly than it has been in 2013. What's more, as less capital is likely to be available, credit standards may tighten, making it more difficult to take on debt.
The Federal Reserve plays a key role in what will happen. In an effort to help stimulate economic growth, for some time the Fed has been putting money into the markets to keep rates low. Now that the economy is growing, those outlays of funds probably won't continue. Mortgage rates have already increased by more than a percentage point since May of this year, partially because the Federal Reserve hinted at slowing its purchase of bonds to stimulate the economy. In addition, the European economy is stabilizing. Growth in countries like Germany is leading investors to direct more funds to Europe and, subsequently, fewer to the United States. This decreases the amount of available capital here.
Rising rates should not throw anyone into panic mode. Although they may increase, a huge fluctuation in rates would be harmful to the progress we've made. So it's more likely that changes won't be catastrophic. For example, increased mortgage rates, which were at historic lows, are still very affordable and the housing market is still seeing gains as a result. Likewise, if rates on business loans go up, the rise in rates probably won't be great enough to deter borrowing.
The question about when to borrow is more a question of how much you can afford to borrow. Depending on the loan amount, a percentage point can mean the difference between fully implementing a growth strategy and cutting corners. It can decrease a named business successor's chances of purchasing your business. Or it can allow you to reach your goals, but squeeze your cash flow beyond what's comfortable for you.
Another question concerning debt is whether you can afford not to borrow. Although there are several low-cost tactics business owners can employ to grow, most growth initiatives require capital. Great success is almost always the result of a calculated effort and significant investment. For businesses without adequate savings for such endeavors, taking on debt can be scary, especially given the speed at which the market and economy can change. Debt often has negative connotations, but securing the right business loan for growth can be beneficial and has helped countless organizations reach their goals.
Even if the Federal Reserve raises rates, borrowing money should still be relatively cheap and credit still should be available in 2014. To potentially pay less for capital and stretch your resources, consider seeking financing soon.
Rick Dennen is president and CEO of Oak Street Funding, which provides commission-based lending for insurance agents that need capital to buy, build or sell their agency. Dennen is a licensed agent in the State of Indiana for life, accident & health products and a licensed certified public accountant in the State of Indiana. In addition, he is an instructor of venture capital and entrepreneurial finance at the Indiana University Kelley School of Business. He can be reached at email@example.com.