Refinance Rap: Boost Cash Flow by Switching Out of a Variable Rate Loan

This post is part of a series sponsored by InsurBanc.

When we first addressed last year’s economic unrest, the Federal Reserve was just beginning to raise rates that had hovered just above zero. Today, the economy is still unpredictable, and the interest rate trend continues in an upward bias, although at a slower pace. The Federal Reserve targeted its response to the current economy with two quarter-point increases in the first quarter, leaving the federal funds rate a full 4.5% higher than in March 2022.

Prior to this upward trend, many independent agencies took out variable-interest-rate loans to fund agency acquisitions or other investments. Payments on these loans — indexed to market interest rates — now have been reset at higher rates. In fact, some agencies have gotten sticker shock. The net effect of these higher payments is a depletion of cash flow for agencies.

I don’t predict what will happen with interest rates, but I do know they could rise further. Economists are watching key factors such as economic growth levels, inflation rates and actions taken by federal interest-rate policymakers. The future direction of rates might be the most-discussed topic on business television these days.

Getting out of a variable-rate loan can help stabilize that all-important agency cash flow. Here are some considerations.

First, check current loan terms. Since many variable-rate loan payments reset quarterly (not monthly), tracking loan interest rates might not be top of mind to an agency principal. Agency owners who haven’t read their loan agreements recently should be sure they’re not in a variable loan.

Second, eliminate interest-rate risk by refinancing into a fixed-rate loan. Most owners want to control as many financial factors as they can. A variable-rate loan might have been favorable in a lower-rate environment, but that advantage has gone away as rates have gone up significantly.

A fixed-rate loan will allow the agency principal to control interest expense cost and eliminate the risk of a rate increase. A stable payment is key to managing and enhancing cash flow which is fundamental to the foundation of the agency’s value.

Third, consider what the stability of a fixed loan payment can do. A level loan payment allows an agency principal to divert funds they save on interest payments into a proactive investment for the agency. For example, can the surplus funds be used to invest in a new producer? Invest in needed technology? Buy a book of business?

Let’s look at a refinance scenario. One agency, with a book focused on property-casualty business in personal and commercial lines, had a loan that funded an acquisition. Made by a local bank, the loan was guaranteed by the U.S. Small Business Administration (SBA).

In the case of this agency loan, the rate on the loan had more than doubled. InsurBanc was able to refinance this SBA-guaranteed loan into a fixed-rate product, saving them thousands monthly and several hundreds of thousands over the life of the loan. Non-SBA variable-rate loans also can be refinanced.

Agencies that have variable-rate loans have the opportunity now to fix it. Contact a lender such as InsurBanc right away to inquire about refinancing to a fixed rate.