Chris Blackham looks at some of the options when looking for finance to set up a brokerage and what to consider.
Creating a new insurance brokerage takes a lot of time and money. Financial and legal advice, setting up your company and its web site, getting FCA approval, buying hardware and broking software and making it work, finding and equipping premises and recruiting and employing staff are just some of the costly challenges you will face. Usually this is before you earn any commission or fees and when these do come in it takes time to build your income to a level where it will cover your running costs let alone your set up costs!
You’ll need funding to help make your dream a reality. Unless you are independently wealthy you will need finance.
Long gone are the days when a friendly bank manager was the main, and for some, the only option for funding a business venture. Fortunately, today’s entrepreneurs can tap into a number of alternative sources of capital. Choice requires a decision. So how do you decide?
1. Banks - the traditional option
Since the financial crisis nearly 10 years ago banks have tended to adopt a more risk averse attitude to business lending. These days they have a preference for existing customers with a track record rather than start-ups.
The benefits of a British bank are that they rarely, if ever, look at an equity stake and their base rates are at an all-time low.
On the downside the application process can be tortuous and it is not easy to convince a bank to grant a loan never mind one sufficient for your needs and they invariably look to secure their loan. This means that it is likely that you will have to risk your home. Flexibility isn’t their strong suit either and fixed term loans can lead to timing issues - repayments may not coincide with how quickly your business earns income - which can be very problematic to manage. So in current times banks on their own are rarely a feasible funding solution.
2. Business Angels - entering the Dragon’s den
Angel investors tend to specialise in funding small businesses, especially if they believe you are on to a winner. They are less risk averse than banks and are likely to seek as large a stake as they can negotiate in your business. They may blend this with a loan although interest rates usually reflect the risk of a new start up. They may also seek some form of security over the rest of your company and possibly your personal assets. That has a number of serious implications that you need to understand and be comfortable with.
Tax efficient investment schemes like Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS) could make this more attractive to them by reducing the net cost for investors and Capital Gains Tax (CGT). These are excellent schemes but the time and trouble in setting them up and some of the restrictions provided by the rules means using them can be counter-productive.
However, owning a share of your business means they may want to be involved in decision making, and the more experienced they are the more control they might want - not necessarily a bad thing if they are pro-active, patient and understand your business but this can be a nightmare if they don’t, especially if you are not bang on budget! If you have the wrong angel you will feel they have too big a share of your equity and profits, and this can be frustrating as it is you who is putting in the hard graft to build the company.
The right angel however will bring valuable experience and sufficient fair funding that will ensure your chances of success are definitely enhanced, although there is always the risk that they will want to end their participation at a time and on terms of their choosing that may compromise that success.
3. Venture Capital - Bigger Dragons
The issues that apply to business angels also apply to venture capitalists but on a different scale. Their agenda is invariably to deliver high rates of return on their investment in relatively short timescales. They are normally a source of larger amounts of funding which means they are good if you are looking for rapid growth in your business.
Apart from cash they may offer access to valuable expertise and experience. Like Business Angels, the timing and terms of their exit are critical.
The reality for small to mid-size start-ups is that the best VC funds are not set up for such amounts and are too demanding with the returns they require to be a practical solution.
4. Insurers
It may be possible to obtain cost effective funding from an insurer with few or even no strings attached. As they are in the same industry you might expect a greater understanding of both the mechanics of insurance broking and expected returns.
However there is the potential for conflict particularly as the regulator will need reassurance that it is truly an arm’s length relationship i.e. there are no requirements for you to place a proportion of your clients’ insurance policies with the insurer.
Even if there are no such arrangements your clients and potential clients might have concerns about the impartiality of your advice thereby compromising your ability to attract and retain business. As the old saying goes ‘there is no such thing as free lunch’ and ‘be careful you may be getting into bed with the devil!’
5. Partnering with an introducer
When you are first starting your business the offer of setting up some sort of joint venture with an introducer you get on with, such as an Independent Financial Adviser (IFA), Accountant or Solicitor can seem attractive particularly if office space is also available. Experience suggests that whilst such arrangements may help early cash flow you will have to give away equity and in most cases the benefits are outweighed by the fact that often business flow from the introducer disappoints and tails off and you are later burdened with an external shareholder that is not justified and you can’t get rid of easily.
6. Vizion - a real alternative
I’ve touched on a number of alternative ways to raise finance to fund a start-up. Each have their own motivation for getting behind you. All have two principle things in common. Like you they want a return on their investment and, unlike you, they are very rarely not in it for the long haul. When choosing a financial partner you must therefore ask yourself:
- do I fully understand their goals and expectations?
- do they understand my business / industry?
- will they offer more than just capital, if so, what additional value can they add?
- how flexible will they be in times of stress for the business?
- how long can I rely on their support - timing of their exit can be critical?
- what are the terms of their exit - a frequent source of conflict often overlooked in the heady early days?
Starting your own brokerage is a real but rewarding challenge. I’ve done it and would recommend it to anyone with energy, drive and ambition. My contemporaries and I however had it relatively easy as the barriers to setting up a business in the early 1980s were much lower – the FCA hadn’t even been thought of!
I am of course biased but I really think Vizion is a great solution for today’s insurance entrepreneurs.
The purpose of Vizion is to allow others to do what I did in today’s environment, encouraging entrepreneurial spirit and easing the transition from being employed to running your own business successfully.
We offer a well run, regulated platform for entrepreneurs who have their own clients or ideas and want to run their own businesses, have their own equity, and a clearly defined exit route for when they decide to retire.
Vizion can provide whatever back office support is required and commission will be shared based on how much day-to-day input the client facing partners wish to have. This is a unique way for a team or an individual to manage their clients and create value for themselves over time without the expense, risk and complications of setting up their own regulated entity.