Insurance is a necessary and a smart expense. It is a product designed to protect you and your business from financial ruins. But when cash flow is low, paying for that protection and coverage can be difficult. Premium financing can be the solution for businesses to consider. Unlike some insurance policies, business insurance policies require the payment of the premium for the whole year all at once at the beginning of the policy term. This cost is the same regardless of if there is a claim filed or not. It is the cost associated with having the insurance policy.
So how does it work to finance an insurance premium? It is similar to other types of loans. But you aren’t making payments to the insurance carrier; you are working directly with a premium finance company. The premium finance company is the one who paid for the policy in full at the beginning of the policy term. The business in turn is then responsible to make payments to the premium finance company.
Commercial insurance policies can get expensive. This can be an added burden to a businesses already high overhead costs. This can be especially difficult for businesses that need to retain their profits in order to reinvest that money into their business to help it grow. Financing is an attractive option that allows businesses to maintain the coverage that they need without having the hardship of losing that cash flow all at once. Since the global pandemic hit in 2020, businesses have taken a hit in their revenue. Counter that with rising insurance premium rates and you have the basic bills go up and cash flow goes down. It is becoming more and more difficult for businesses to be able to pay for their premiums. Financing is becoming a more attractive option, especially given the current economic situation.
Now obviously there are disadvantages as well, and we would be remiss to bypass those. It is obviously a loan, which means that there is interest associated with it. You are required to repay the loan and any fees and interest associated with that. So you will be paying more out of pocket for the insurance policy than if you were to pay the premium in full at time of effective date of the policy. Now as with any loan, this loan is able to default. If payment isn’t made the finance company will be forced to default the loan and call in the collateral that was placed against the loan. In this case, the collateral is the policy itself. The premium finance company has the right to terminate the policy and work with the carrier to get the fund distributed back to the finance company.
So it is up to the business to decide if the pros outweigh the cons when it comes to financing their insurance policy. As always, it is important to look at all aspects, including the interest rate, the value of the policy, the finance company and the terms of the agreement. Make sure that you understand what you are doing and determine from there what is right for your business.