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Loan Types
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Business Loans for Insurance Brokers
Take your insurance broking practice to the next level with a business loan for insurance brokers.
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Today more than ever, individuals and businesses have the power to choose and compare. This is especially the case with insurance products, with people forgoing the antiquated idea of loyalty to a particular insurance company in favour of comparing policies and premiums to suit their individual needs.
Insurance brokers are the go-to people when individuals and businesses alike want to compare their options and find the right mix of insurance policies for their circumstances. As such, the insurance broking industry in Australia continues to grow and thrive.
If you're an experienced insurance broker and looking to take advantage of the increased need for reputable brokers in Australia, now is the time to consider purchasing an existing insurance broking business or a revenue stream such as a book of clients. You may also want to purchase or fit out commercial premises.
There's a lot to think about before making the decision, so let's review some of the points you need to consider before buying an insurance brokering business.
Business Loans you can apply for
Choosing an insurance broking business to purchase
Factors to consider when evaluating a business
When evaluating an insurance broking business or book of clients, consider the following:
- What is the current portfolio of the business? What is the makeup of the client base and the insurance products being sold?
- Does the broking businesses portfolio suit your skills and expertise?
- What is the financial history of the business over the past three years? Reputable sellers will provide audited financial documents including profit and loss statements on request, but may require a confidentiality agreement. Speak with your accountant to determine whether the business's financial history matches any verbal claims made by the seller.
- Why is the business being sold? Is the owner legitimately retiring or moving to another opportunity, or is the business failing financially? A comprehensive look at the business's financial documents will provide much-needed insights.
- What is the reputation of the insurance broking business?
- Is there any current litigation or are there unsettled liabilities of the business? Will the current owner indemnify you against any issues that occur in the future relating to previous business transactions?
- What is the age of the business? An older business could suggest that it's well-established in the industry and enjoys a good reputation. On the other hand, an older business may not have kept up-to-date with best practices and current software solutions.
- Are staff members willing to stay on if you purchase the business? Will the current owner consider a transition period of at least six months?
- Will the current owner agree to a restraint of trade clause?
- Will the current owner agree to a guarantee of gross fees for 12 to 24 months, with a portion of the purchase price withheld in the meantime?
Seek independent advice
As with any business transaction, it's essential that you seek independent advice before signing a contract or even before approaching a lender for an insurance broking business loan. Independent advice allows you to put the transaction at arm's length, to separate emotion from objective facts, and to consider the feasibility of the purchase from a legal and financial standpoint.
Consider seeking advice from the following professionals:
- A solicitor, who can ensure that the business and/or commercial properties are free of caveats and have good title, and who can advise you on potential contract inclusions such as a restraint of trade clause, guarantee of gross fees or indemnification against existing liabilities or legal matters.
- An accountant, who can analyse the financial records of the business and provide advice on the feasibility of the business and the serviceability of loan repayments, and can assist you in preparing a business plan and cash flow forecasting documents to accompany your loan application.
Getting approved for an insurance broking business loan
Wondering how to finance all these initiatives? Find out how to increase your chances of getting approved for an insurance broking business loan.
How much can I borrow?
The amount you can borrow will depend on your financial circumstances, your borrowing power and whether you have appropriate residential property to offer as security for the loan.
As a guide, suitable applicants approved for a secured business loan can borrow up to 60% of the value of a book of clients, and up to 70%of the value of freehold commercial property.
How to get approved
The key to getting your insurance broking business loan application approved is to understand what banks and other lenders are looking for in a customer, and the factors that lenders consider when evaluating a loan application.
If you look at the loan application process from the lender's point of view, you'll increase your chances of getting approved for finance because you'll be prepped to provide the lender with the information they need to know. Lenders look for:
- Evidence that you have the experience and expertise to run a successful insurance broking practice. Think of the loan application process like a job interview and update your CV to include all relevant management experience to prove that you have the skills to run a successful venture.
- At least five years of experience in the insurance broking industry, and ideally three years in a managerial or similar role.
- Evidence of your Australian Financial Services licence at the outset.
- Willingness to be upfront and honest about your financial circumstances, as well as the financial standing of your current practice or the practice you intend to purchase. Have full audited financial records ready to provide to the lender for the past two or ideally three years, both for yourself and for the practice.
- A business plan written with the assistance of your accountant which includes a cash flow forecast for the business. The lender wants to be assured that you have a solid, feasible plan for the practice, along with the skills and resources to bring the plan to fruition.
How lenders value an insurance broking businesses
The insurance broking industry is unique, and lenders have devised certain performance benchmarks that they use to assess the feasibility of an insurance broking business or book of clients. These benchmarks will vary from lender to lender, but as a guide, assess whether the business or book of clients you intend to purchase satisfies the following:
- Minimum gross written premiums (GWP) of $1 million
- GWP distributed among a variety of insurance providers, with no overwhelming concentration with one insurance company
- Revenue distributed among a variety of clients, with no overwhelming revenue concentration (ie, above 20%) attributable to one client
- Earnings before interest and tax (EBIT) of at least 20% of total revenue
- A minimum of three distinct insurance products on offer to clients.
If the broking business or book of clients does not satisfy the above benchmarks, it doesn't mean that your finance application will be automatically declined or that the purchase is necessarily a bad one. It may mean, however, that the lender will require additional security over the loan, or that you could consider offering a lower purchase price to the seller.
Types of finance for insurance broking businesses
Finance options
At times it can be difficult for insurance brokers to obtain funding to purchase a business or book of clients or to fit out or purchase commercial property. This is because some of the major lenders have historically turned away from insurance brokers due to a lack of understanding of the industry. As a borrower, you have a number of options when it comes to obtaining finance for your insurance broking business, and it may be that an independent lender such as those detailed on this page could be more willing to offer finance and make the process easier than one of the big banks.
Banks can be a viable option for applicants with a strong financial history, a detailed, feasible business plan, and sufficient security such as residential property to secure the loan. A bank may offer a secured business loan to a suitable applicant.
Alternative lenders are more likely to consider the individual circumstances of the applicant and to assess the future potential of the business. Alternative lenders could offer a secured business loan to a suitable applicant, or an unsecured business loan to an applicant who may not have residential property to offer as security for the loan. Unsecured business loans tend to attract higher interest rates and less favourable loan terms, however they give borrowers the opportunity to access funding that may have otherwise been unavailable.
Comparing business loans
When comparing business loans, the first step is to assess the eligibility criteria of the individual lender and the loan product. This assessment will help you to eliminate business loans that don't apply to your individual circumstances.
Next, consider the ongoing repayment terms of the loan products, and how they fit in with your business's needs. After preparing your business plan and financial documents, you will have a good idea of the loan repayments that you can comfortably service. Eliminate business loans that offer inflexible repayment terms, or a loan term too short to be comfortably serviceable.
With more and more alternative lenders entering the finance arena, as a borrower you have the power to compare and choose financial products to suit your circumstances.
Picture: Shutterstock
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