Credit providers have become increasingly focused on understanding what drives behaviour and credit risk in specific industries, and setting lending policies accordingly.
There are now a number of established policy guidelines across traditional service industries such as Real Estate Agencies, Financial Planning, Finance Broking, Insurance, Legal and Accounting.
If you involved in these industries, funding can be a good option for growth (acquisitions etc) or to help in building succession planning.
In Focus - Insurance Brokerages
SME's in the Insurance Broking industry primarily specialise in risk management. They act on behalf of their clients and provide advice in the insuring of a range of assets and risks.
Accordingly to IBIS World data, there are around 5,700 businesses in the industry with combined Revenue around $16 Billion and circa 22,500 staff. The industry has grown substantially in recent years. Along with the strength of asset prices, the availability of credit and other demand led factors have seen valuations of these practices climb materially.
Like other professional service firms, these businesses often have excess capacity and are chasing a better recovery of fixed overhead costs, they may have a need to acquire new people to meet growing demand for services.
Lender Appetite - Insurance Brokerages
Banks are growing their appetite for lending to Insurance businesses. Historically, this has been based on the nature of recurring revenues through their commission revenue which builds confidence on the continued ability to service debt.
In terms of participants, the major lenders, plus other providers such as Macquarie Bank, Judo Bank, ANZ Bank, NAB etc. have policies in the category.
Debt Strategies
Insurance Broking practices do have a history of consistent revenue flows. Therefore, success in managing money and debt typically embraces the following strategies.
- Match the loan term to the period in which benefits are generated.
This is always true for acquisitions or expansion in this sector. With the benefit generated by the acquisition unlikely to sustain forever, despite good management. A longer term P&I facility is usually a better option than an interest only term, followed by aggressive amortisation.
- Consider the security profile and how its links to credit terms.
One of the positive things about borrowing in Professional Services, is the ability to borrow without tangible security such as property or varying levels of guarantees etc. However, make sure the nature of the security provided fits the resultant impact on price and/or terms.
How much can I borrow?
Lender philosophy is advancing in assessing professional services firms, including Insurance Broking.
Typically, this is based on a percentage of the valuation, which historically focuses on the recurring commission and fee income. Financiers will consider strength of other cashflow but quality of customers remains the critical factor.
When it comes to talking with the bank, it is important to determine what the actual income is to use for loan servicing. Yes, most of us are familiar with EBITDA, but what about adjusting for a market salary for the owners? When putting in a market value of the Owners' contribution this can change this number materially. This is what we call "EBITDAO".
Once the income is normalised, borrowing limits are generally based on the following guides:
1) Maximum loan amount to be less than around 2.75 - 3.5 times EBITDAO
2) Interest Cover Ratio ("ICR") of more than 2.50 times
3) Maximum loan amount to be less than 60-70% of independent valuation.
Lastly - it is not just the size of the Revenue/Earnings but the quality of it. The latter will drive the attractiveness for both lenders and prospective buyers too.
Criteria does vary widely and is emerging very quickly now and into the future.
More information?
Contact MCP:
E - mcpnews@mcpgroup.com.au
W - www.mcpfinancial.com.au
T - (03) 9620 2001
The team at MCP Financial Services has specialised expertise in advising and managing banking for the Professional Services industry. We support Accounting, Financial Planning, Insurance, Real Estate, Architecture, Finance Broking and related service industries.