How premium finance can support business growth in 2024

Young woman completing paperwork at a desk

The UK Business Risk Report found that business leaders are in a surprisingly bullish mood. Most business leaders are expecting improvements across a range of commercial metrics – from turnover and productivity to profitability. Interestingly, close to half expect to increase capital investment over the next 12 months.

For those firms planning to invest in growth, financing those investments may prove challenging, and may demand business leaders find new ways to free up funds.

The challenges of assessing finance

Securing debt finance through traditional routes is currently a real challenge for UK SMEs.

Recent research found UK SMEs struggling with a funding crunch - 59% said access to the finance they need to invest in growth is more difficult now than it has been for five years. In fact, 43% say it is one of the biggest challenges they face this year and 73% complain that institutional lenders have failed to take the time to understand their businesses.

What’s more, those who are successful in securing funds for capital investment through traditional routes will almost certainly find themselves paying comparatively high rates of interest. Those rates come thanks to a combination of a base rate standing at 5.25% and banks pricing a ’risk premium’ into finance for SMEs.

With capital injection at the heart of firms’ plans - 71% report that they’re looking for funding to accelerate expansion – this is a situation that will leave many seeking new ways to free up working capital to invest in growth.

Premium finance: A novel route to growth funding?

In response, more and more SMEs are looking at premium finance as a means to free up working capital and manage costs. But what is premium finance and how can it play a role in supporting firms’ capital investment plans?

What is premium finance?

In simple terms, premium finance is a way to spread the cost of insurance, enabling premiums to be paid by monthly instalment, rather than a single up-front payment.

A specialist lender provides the funds to pay premiums up front, then collects regular monthly payments plus interest. This arrangement will be familiar to most people with home and motor insurance.

However, the benefits of this approach when it comes to business insurance can reach far beyond simply avoiding a large, single payment for insurance premiums. For SMEs, premium finance can have positive impacts on your business’ cash flow, tax, and balance sheet – and can play an important role if you’re struggling to access finance.

The growth benefits of premium finance

For businesses seeking to invest in growth, using a premium finance arrangement to cover insurance premiums can have a range of benefits including:

Improved cash flow: Avoiding large up front insurance premium payments can improve cash flow, and free up working capital to invest in growth, all without impacting your business’s line of credit.
Tax relief: Premium finance interest payments are tax deductible, which can help to further release working capital by reducing your firm’s tax liabilities.
A healthier balance sheet: It is also possible to classify premium finance payments as off-balance sheet, improving the financial position of your business overall, freeing up capacity to invest in growth, and making it easier for you to access debt finance.
Rapid access: What’s more, premium finance applications are typically approved quickly, thereby offering rapid access to finance, compared with the weeks or months it can take to secure funding from lenders.

On top of that, premium finance can also create administrative efficiencies. A single premium finance arrangement can be used to cover the cost of multiple insurance policies, paid for via a single monthly payment.

How does premium finance compare?

For businesses seeking to invest in growth but struggling to access funding, all this makes premium finance so much more than a way to spread the cost of insurance. In fact, as the table below demonstrates, it compares favourably to many of the more traditional sources of debt finance for SMEs:

Comparison based on £13.5k premium	Premium finance (Close Brother Premium Finance as at 04/12/23)	Business overdraft (Barclays Business Overdraft web page as at 04/12/23)	Credit card (Santander Credit Card options web page, as at 04/12/23)	Business loan (NatWest Business Loan web page as at 04/12/23)
APR%	17.56%	29.50%	29.80%	12.37%
Fixed rate of interest	Y	Y	N	Y
Fixed end date	Y	N	N	Y
Guaranteed acceptance*	Y	N	N	N
Unsecured	Y	Y	Y	N
Held off balance sheet	Y	N	N	N
Potential tax relief	Y (on interest)	N	N	N

_{*Subject to due diligence checks}

The bottom line is that premium finance can provide an efficient, convenient alternative route to funds.

This is particularly useful if your business pays higher insurance premiums, or you’re seeking to manage cash flow, or free up funds for investment.

At a time when many firms are seeking to invest in growth, but access to traditional funding is limited, it could provide a valuable alternative, though seeking advice from a broker is an essential first step.