A client came to us with a problem. When he bought his agency he found local bank financing on a five year loan with a balloon payment at the end. He could manage the monthly payments with the money saved when the seller retired and he hoped that his growth would sponsor enough to make the balloon payment (or he could finance that balloon payment at that time).
During that five year period he could pay himself but he didn’t have enough ready cash to hire producers and he had to pass on an opportunity to buy another small agency because he didn’t have enough liquidity to sponsor further debt.
Now the Bogeyman has arrived – the Balloon Payment is coming due and my client had no further cashflow than he did originally. His solution was to finance the balloon payment – again – and continue his debt at higher finance rates.
What never entered his mind was to refinance the debt to accomplish no less than three beneficial financial changes to his agency,
- Lower both interest rate and monthly payments over a longer period of time saving the agency in lower monthly payments,
- Eliminate the “bogeyman” of balloon payments completely, and
- Fund the capital investments he wanted to make through the hiring of producers and funding marketing for growth.
Here’s an example of a Working Capital Refinancing that is typical of what can be done for many agents. It was a $1MM financed loan that was refinance after two years. The monthly cost was lowered by over $5,000 AND it gave the agent an additional $85,000 in Working Capital with which to fund a producer for two years until he was self-sufficient.
Existing Loan New Loan
Loan Amount $763,839 $870,600
Original Loan Term 5 Yrs 10 Yrs
Orig Loan Amortization 7 yrs 10 Yrs
Interest Rate 7.25% 6.45%
Monthly Payment $15,215 $9,863
Balloon Payment $338,974 Not Applicable
Funding sources are readily available for loan refinancing based on your agency’s value and cash flow as defined by a Valuation by Agency Consulting Group, Inc. Call us at 856-779-2430 to discuss the potential of converting your agency debt into a more manageable loan that will give you both lower payments and ready cash for needed capital expenditures.