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When you need a business loan, where do you turn? For most business borrowers, the answer is a four-letter word: b-a-n-k. But, for companies looking for long-term loans, a growing number turn to life insurance companies and pension funds.

How other sources work

Banks, insurance companies and pension funds will all make loans for varying lengths of time to companies that have good growth prospects. These loans usually are referred to as term loans.

Banks prefer to make relatively short-term loans, although they often are willing to roll them over periodically if a borrower lives up to the payment obligations.

Life insurance companies usually are interested in lending to credit-worthy companies that want money for five years or more. Pension funds also are looking to make longer-term loans. The average is 10 years or more.

Life insurance companies and pension funds are in the business of gathering assets, whether they are insurance premiums or retirement funds, and managing them prudently during the long term so that they are able to pay the benefits to which they are committed. To do this, they use a broad range of investment vehicles including stocks, bonds, real estate, venture capital and loans.

How does a business borrower explore financing from an insurance company or a pension fund?

Usually the best way is to start with their commercial banker.

Insurance companies and pension funds are most interested in lending to companies that have established businesses with good credit histories. Their goal is to provide long-term loans to companies that can provide them with a reliable stream of interest payments.

Like a bank, a life insurance company or a pension fund will place restrictive covenants on the business borrower to provide a certain degree of protection from default on the loan.

There are three types of loan covenants:

• General provisions: General provisions are common in most loan agreements. They require the business borrower to maintain a certain amount of liquidity at all times and to limit cash outflows. They also limit the borrower from selling important assets and taking on significant additional debt.

• Routine provisions: Routine provisions are found in most loan agreements. They are basic terms that are not subject to modification during the term of the loan, and include providing the lender with periodic financial statements, maintaining adequate property insurance and restrictions on major acquisitions.

   

• Specific provisions: Specific provisions are restrictions designed to guarantee the management team of the company borrowing the money is fully committed to enterprise.  This may include requiring key executives to sign employment contracts or take out substantial life insurance policies. These provisions may restrict management changes and salary levels.

The hurdles to lining up loans from alternative lending sources are not insignificant, but for credit-worthy business borrowers, having a good banking relationship and long-term relationships with life insurance companies and pension funds could provide all the funds the company could ever need for substantial future growth.

Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.

Evan R. Guido
Vice President of
Private Wealth Management

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