Understanding the Different Types of Interest Rates Lenders Use

With recent Federal Reserve rate cuts, many independent agency owners are rethinking how to grow their businesses. As borrowing becomes more affordable, some are considering debt financing as a means to support expansion — whether through acquisitions, technology upgrades, or talent recruitment.

Navigating Agency Growth: M&A, Technology Investments, and Debt Financing

One of the most common paths for agency growth is through mergers and acquisitions (M&A). Though deal volume has declined in 2024, EBITDA multiples remain historically high. Equity plays a growing role in deal structures, and the process is taking longer to complete than in the past.

At the same time, more agencies are diversifying their growth strategies. Some are investing in new technology, such as artificial intelligence, to streamline operations and offer more personalized services. Others are focused on building stronger production teams, which may involve recruiting skilled talent or even merging with another agency. These efforts often require working capital loans to bridge cash flow gaps during ramp-up periods.

Regardless of the strategy, debt financing is likely to play a role in funding growth. Understanding how lenders determine interest rates can help agency owners make more informed decisions when choosing financing partners.

Key Benchmarks That Drive Agency Loan Interest Rates

Lenders typically base interest rates on a few key benchmarks, adjusting for market conditions and borrower profiles. Here are the three most common types:

1. Federal funds rate: This is the overnight interest rate banks charge each other to meet Federal Reserve reserve requirements. While the Fed doesn’t directly set this rate, it targets a range and uses tools to keep the actual rate within that band.
   
   
2. Prime rate: Set by banks, the prime rate is what they charge their most creditworthy borrowers. It usually hovers around 3% above the federal funds rate. Many lenders use the prime rate as a starting point for variable-rate loans.
   
   
3. Treasury yield: Some lenders base interest rates on yields from U.S. Treasury securities, particularly the 1-month or 10-year notes. These yields reflect investor confidence and are often used for fixed-rate loans.
   
   

To the base rate, lenders typically add a spread based on risk factors like EBITDA, cash flow, and loan purpose. Loans tied to acquisitions may carry higher perceived risk compared to those for working capital. That’s why working with a lender who understands the insurance industry can result in more favorable terms and tailored solutions.

Get in touch with us to enroll in AAI and embark on your journey as an independent agent. Discover how you can launch and manage the business you've always dreamed of, with the added advantage of receiving guidance from industry experts.