Agency Financial Management

2013 should be a good year to borrow

Agents and brokers will benefit from available credit in 2013

By Rick Dennen

The financial crisis of 2008 and subsequent Great Recession created challenges the United States hadn't experienced in more than a half-century. It also created a lot of pain for consumers, government and business alike. It's not surprising that the chatter, speculation and anticipation over what the next few years may hold for Americans has been at a fever pitch.

In the midst of the recession and struggling recovery, businesses have been in a quandary over how to manage their strategic direction. Many have remained in a holding pattern, awaiting strong signals of an economic rebound, while others have taken advantage of any opportunities they could squeeze out of the adverse circumstances.

Now that we're close to entering 2013, what's next?

Despite the uncertainty of the last few years, one fact remains: It's awfully difficult to grow without capital. Whether business owners want to grow through acquisitions, by hiring new producers or through refinancing debt to improve cash flow, the capital to do this has to come from somewhere.

Thankfully, it appears that insurance agents and brokers can anticipate a positive capital outlook for 2013. The July 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices published by the Federal Reserve System, along with other signs in the market, point to a year that should bring good conditions to take on debt in the form of a loan, working capital or refinancing:

• The Federal Reserve announced that it will likely keep rates low through 2013.

• Banks are loosening credit standards on commercial and industrial loans for large and mid-market firms.

• While the economy has seen sustained growth, the slow pace should continue along with improvements in unemployment.

• Borrowing money should be relatively cheap, and credit should be available.

Knowing where to find the right credit is important. Many business owners seek capital at banks, through personal or business credit cards, and through loans from friends and family. However, there are more options and choosing the right source can significantly increase the probability of getting funding.

Here are the major sources of funding and what the outlook is for credit availability in 2013.

Larger banks

Larger banks are often top-of-mind with agency owners when they need a loan, but banks haven't traditionally favored making loans to insurance agents and brokers. Banks shun collateralizing any type of future cash flow, such as commissions. In addition, banks tend to make sizable loans. This works for larger organizations that need millions of dollars; however, just 5% of loans made by big banks are to small businesses. In 2011, some of the largest banks committed to increase small business lending over a three-year timeframe. The Federal Reserve survey mentioned above showed loosening credit standards for large and mid-market firms, however; it also revealed little change in credit for small firms. Thus, a trend in small business loan increases by larger banks remains to be seen.

In light of the financial crisis in 2008, bank regulators still have great concern over losses. In addition, new regulations will force compliance that may decrease business loans. The Dodd-Frank Act and Basel III impose capital minimums and liquidity limitation, so banks are now required to have more cash available for emergencies. This may result in credit that is primarily extended to larger companies with tangible assets. As proof, commercial loans of less than $1 million dropped 14% from 2008 levels (FDIC data) and banks have yet to feel the brunt of regulatory changes.

Community banks

Smaller community banks provide more loans to small business as a percentage of their total loans. However, the increased cash requirements to which they are subject may translate into fewer loans extended to businesses in 2013. To make matters worse, several smaller banks that received Troubled Asset Relief Program (TARP) funds from the federal government are faced with repaying those funds now through next year, and many are struggling to do so.

Credit unions

Credit unions have increased business loans by 22% since 2008 (National Credit Union Administration). If they get their way, credit unions will continue that upward trend. A new bill was introduced that could potentially give credit unions greater capacity to fund small businesses. If passed, the bill will raise credit union limits on loans to 27.5% of their assets from 12.25% today. With the average business loan from a credit union approaching $200,000 (NCUA), 2013 could see more loans to smaller businesses, although it's not clear if credit unions will want to fund businesses that collateralize their commission stream.

Non-bank lenders

Re-lenders have been a good source of funds for small, medium and large businesses. While they are just as concerned about avoiding losses as other lenders, they are not subject to the same regulations as banks and credit unions. As a result, re-lenders can extend credit to businesses that might otherwise be ineligible for a traditional bank loan that leverages tangible assets. Since the business model of these entities is to target markets that banks won't, their unique position allows re-lenders to meet capital needs across several industries, business types and industries. Within the insurance agency and brokerage arena there are niche lenders that provide financing exclusively for insurance professionals.

For those re-lenders that are financially strong and have consistently demonstrated sound, stable portfolios, loan capacity should continue to be great. Credit facilities (like wholesale banks, equity investors, etc.) tend to favor their relationships with re-lenders. Because commissions are usually the biggest assets for insurance agencies and brokerages, owners should match up with the right funding sources and put their business in a good financial position to meet lending requirements. With the right lender, insurance businesses will have to be financially solid with favorable credit, but they won't have to be perfect.

In addition to the availability of capital at relatively low rates, 2013 will provide good opportunities that will require capital. The insurance market is hardening, leading to greater cash flows for agents, carrier consolidation should continue, and widespread retirements are looming as more than 50% of insurance agents are 63 years old or older. This means a record number of agencies and books of business may be for sale and capital will be needed to finance acquisitions.

Last, 2013 will be a good time to borrow capital because agents can't continue to put off plans for growth. While no one can predict when the economy will reach pre-Recession levels, successful entrepreneurs can determine a way to grow despite adversity, especially with the right capital.

The author

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 Kelly School of Business. He can be reached at rickdennen@oakstreetfunding.com.

N. B.: The materials in this article are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this article, including sending an e-mail, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street.