This post is part of a series sponsored by InsurBanc.
It’s amazing how the world has changed during the first quarter of 2022. Globally, there is unrest that is both heartbreaking and nerve-wracking. Domestically, we are all navigating a “greater than anticipated” jump in inflation, continued supply shortages, and wallet-draining fuel costs. To curb inflation, the Federal Reserve increased interest rates in March, the first rate hike in several years. Most experts anticipate a total of six or seven 25-basis-point increases this year.
What can your agency do to endure these monetary policy adjustments? Here are two actions to consider:
First, review the terms of any debt instruments you currently hold. Rising interest rates can noticeably increase your payment if you are carrying debt that has a variable interest rate. Many agency term loans, especially SBA, are variable rate loans and therefore subject to these pending increases in rates.
Most experts believe rates could rise as much as 2% through the balance of 2022. Consider a $1 million note on a 10-year amortization: A 2% increase could result in a $1,000 increase in the required monthly payment, and potentially $120,000 in additional interest over the life of the loan. Some prognosticators indicate further rate increases in 2023.
Take action now to fix the interest rate on your agency’s debt and avoid the additional expense.
Second, if you are planning any capital changes, such as completing a perpetuation step, purchasing a book of business, or purchasing an agency, consider advancing the timetable. There is significant interest expense savings to capture as you access capital. All signs point to the cost of borrowing increasing quickly in 2022. Securing fixed-rate financing prior to these pending rate changes can result in significant long-term savings.
In both cases, it’s important to act quickly. Reach out to a banking expert who understands the independent insurance agency model and explore options for addressing these items. Be sure to select a relationship that can meet your needs and help fuel your plans as you continue to navigate 2022 and beyond.
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