Premium Financing Protects Your Company’s Cash

Premium Financing Protects Your Company’s Cash

Most thriving businesses want to preserve liquidity to buy equipment, start new projects, hire more people or expand. Maintaining cash reserves may also get a business over a slowdown or deal with an emergency. Commercial insurance is an essential part of a business’s operational expenditures, but it can also tie up large amounts of cash and collateral.

Premium financing

Premium financing allows you to spread out your insurance payments over several months instead of paying in big lump sums. Premium financing may also provide flexibility if you have seasonal increases and drop-offs in revenue.

One of the biggest benefits of premium financing is that it’s separate from existing credit facilities. That means it won’t drain other sources of investment or operational funds. Moreover, it usually doesn’t harm your credit score, and it sometimes doesn’t require collateral.

Commercial insurance premium financing can be applied to all types of business insurance policies and can be set up through your insurance agent. Often, you can finance multiple insurance policies on one overarching contract and pay for all of them in a single, consolidated monthly payment. The insurance policies may even be through multiple insurers. Many premium finance companies offer easy online account access, so managing the relationship is also convenient.

One drawback to premium financing is the interest rate. You must decide if the value of keeping cash on hand is worth the cost of financing your insurance premiums. Your financial officer should also consider whether it’s better to finance your insurance premiums or liquidate assets so you can afford them.

If you opt for premium financing, know that you must make your payments on time or your insurance protection could be jeopardized. In fact, nonpayment could result in suspension of coverage and loss of premiums paid and any collateral posted.

Letters of credit

An alternative to standard premium financing is an insurance letter of credit (LOC). Some LOCs operate off your balance sheet, meaning they do not reflect as debits. Many do not require collateral but do require a good credit score and proven financial stability. Still, they offer the same benefits of keeping cash liquid and allowing you to spread premium payments over time rather than in a lump sum. LOCs also allow current lines of credit to remain intact for emergency or operational use as you see fit. Fees are designed to keep the product competitive.

Premium financing or an LOC may be a valuable alternative to standard premium payments if:

• You have a high need for liquidity.
• You have a low tolerance for large lump sum payments.
• You desire a set premium payment per month.
• You prefer flexible premium payments based on seasonal revenue fluctuations.

These options are appropriate for small, midsize and large enterprises alike. They can preserve your credit score and offer an extended source of liquidity.

An insurance agent can educate you about the advantages and disadvantages of premium financing and LOCs. Ask them to show you options to solve your insurance funding concerns.