The COVID-19 pandemic has not only sickened and killed tens of thousands of people. It also threw the U.S. economy into a tailspin. The official unemployment rate tripled to 11.1% between February and June 2020. Economic experts predicted in early July that the economy would shrink by 7% in 2020.
Despite this environment, insurance agencies will still need loans for acquisitions and new technology. Will they be able to get them?
According to Peter Friedman, president and CEO of lender AgileCap and host of the Insurance Agency Insights podcast, borrowers with strong financials should still have access to credit markets. The federal government’s Paycheck Protection Program (PPP) and Small Business Administration (SBA) loans are currently dominant. Friedman likens this to “free money” being given away that most agencies should use. As those sources of funds begin to recede in the fourth quarter, private loan availability will depend on the public health and economic situations. “The longer uncertainty exists,” he explains, “the harder it will be for borderline borrowers.”
Craig Street, chief lending officer for United Midwest Savings Bank, agrees. “I do believe there will still be funding for well managed agencies,” he says. However, he also expects some credit tightening because of the uncertainty, which makes financial markets skittish. He expects SBA loans to continue as a significant part of lending to insurance agencies.
One cloud on the horizon for agencies is the expected wave of return premiums and commissions that will occur following premium audits. While many insureds had their estimated payrolls and sales reduced, there may still be substantial return premium audits. That will in turn force agencies to return commissions.
Jim Jones, president of Quivira Capital, says that the mix of personal versus commercial business in the buyer’s and seller’s book will affect the availability of a loan. “This could be especially true for agencies with niche commercial books,” he adds. Friedman notes, however, that it depends on composition of classes. Some sectors have done better than others. For example, the boom in package delivery to peoples’ homes has benefited the trucking industry. Agencies who insure sectors like that have less to worry about. In any case, he says, “Our customers are not freaking out.”
Both lenders agree on advice for future borrowers:
● Organize your financial records
● Be prepared to explain how the pandemic has impacted your business and what you’re doing about it.
In addition, Jones advises agencies to focus on account retention through frequent client contact and proactive searches for ways to save them money. He also recommends expense reductions that do not impact service levels. Friedman advises hoarding cash. Street asks for patience with lenders. “Lenders are trying to figure it out, too,” he says. “Patience and kindness go a long way.”
Jones cautions that the pre-COVID way of doing business may never return. For success, “Determine what changes in your operations, marketing and servicing, etc., need to be made for meeting your clients’ current and future needs in this new environment.”