Refinancing Your Existing Debt

Refinancing Your Existing Debt
By: Kelly Drouillard, Live Oak Bank

The goal of any independent insurance agency is to grow and build long-term wealth. To get to a place where an agency can fund growth initiatives and make money, owners often obtain capital via specialty loans, use of liquid investments, seller finance, or funding from friends, family, and other supporters. This financing may be debt on less than ideal terms, including interest rate, loan term or both.

If you are an agency owner, with an expensive or steep repayment plan on your business debt, you may be feeling like you’re never going to generate the kind of cash flow to meet the needs of your agency, extinguish debt and experience the growth and achievement you dreamed of when starting your company.

The backbone of an agency is the cash flow.  It may have been prudent and necessary to take out loans, seek investments, or otherwise bring outside money into the company to get off the ground; you don’t want to let repaying those debts prevent you from actually taking off. When looking at the obligations you need to pay back, consider how much extra money you will have after making your monthly payments.

Can you afford to hire the producers you need? Are you meeting the demands of your customers? Are you ready for an acquisition? Or are the payments holding your agency back from really being what it could be? If so, you may need to consider restructuring debt to reduce your monthly payments.

Here are a few ways you can refinance your debt, significantly decrease your current monthly payments, and begin seeing your agency grow.

  1. Live Oak Bank’s SBA 7(a) Loan Program

With the SBA 7(a) loan program, you can restructure your debt into a more manageable repayment plan. While not all debts are eligible for this program, if you meet the requirements of the policy, it is an easy way to reduce pressure from your lenders and start seeing more money going into your business.  Typical insurance agency loan terms are 10 years with interest rates from 5.5% to 6.25%.   There are no prepayment penalties for loans with terms less than 15 years.

To be eligible for the SBA 7(a) loan program, you will need to meet the following qualifications:

  • Money secured from loans, borrowing, or investments must have been used for eligible business purposes.
  • The debt must be current.
  • The monthly loan payment for the proposed plan must give at least 10% cash flow savings or the existing note must include a balloon payment.

If you meet the requirements of the SBA 7(a) loan program, you can create a plan that is much more manageable for you and your agency. With a lower loan payment, you can focus on growing your business, put the money into things like agency development, and see your company reach the levels of success enabled by improved cash flow.

  1. Refinance to avoid “Balloon Payments”

When you take out a small business loan for your insurance agency, it is not uncommon for a loan to have what is called a “balloon payment.” A balloon payment occurs when the terms of the loan state that one large payment will be made at the end of the loan’s term. While this can give you years with a smaller payment, it also means you will be faced with a significant payment once that time is up.   A typical structure would be a loan with a 10 year amortization / five year balloon.   Thus, your monthly payments are based on a 10 year loan; however, the remaining balance is due all at once at the end of Year Five.  Balloon payments create a looming financial obligation.

If you do not properly plan for a balloon payment, you will be left to drain the extra cash from your business, reducing any cushion you may have created. You may also face high interest rates, meaning you’ll pay much more for the loan than the initial amount of money you received.

If you are trapped in a loan that ends in a balloon payment, you will probably want to consider refinancing. Refinancing your debt allows you to spread that balloon payment out over more time, preventing you from paying one large sum. With a refinanced repayment plan, you make small payments on your loan while ensuring that the cash flow to your business is not disrupted.

  1. Refinance for Longer Loans

For most agency owners, the typical loan acquisition may have seller financing with a term of five years. While a shorter loan term can be paid off more quickly, it also means you will be making higher payments on the loan each month. For a growing business, this can take away cash needed for operational growth and marketing.   A refinance solution under the SBA 7(a) program may be a 10 year loan.   Plus, there is the bonus of paying off the seller note and finally cutting ties with the seller.

SBA 7(a) loans (under 15 year terms) do not have prepayment penalties.   This gives you the cash flow flexibility to pay off your note early if you desire.

Before taking out a loan, be sure that you understand the details of the repayment and if it is a realistic situation for you and your agency. If you find that you are unable to meet the needs of your loan, don’t hesitate to restructure.

Restructuring your debt opens up doors to allow that money to be used elsewhere. With the money you will save each month by restructuring your debt, you can hire new producers or other staff to take your agency to the next level.  You could also buy equipment to be more efficient in the workplace or relocate to a new area with better customer access.

Thinking about your cash flow is the most important aspect of running a business. When it comes to your success, it is mostly determined by how smoothly you run your business and if you make enough money to keep moving forward. Don’t allow the loans, investments, or financial support that got you off the ground be the reason your company didn’t reach your desired levels of success.

For a refinancing proposal, gather tax returns for the past three years (agency and personal), the details of your current agency debt, and give us a call.  We can quickly analyze your situation to determine if a refinance make sense.

Kelly Drouillard is the General Manager of the Insurance lending division at Live Oak Bank. Reach her at 913.980.7773 or kelly.drouillard@liveoakbank.com

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