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Risk in Context

How Premium Finance Can Help You Optimize Your Use of Capital

Posted by Paul Kmiecek August 13, 2018

US GDP grew 4.1% in the second quarter, the latest sign that the economy remains healthy. But companies are still taking a cautious approach to their balance sheets and cash reserves. According to the Association for Financial Professionals’ July 2018 Corporate Cash Indicators report, companies continue to accumulate cash.

Even in times of prosperity, businesses must still manage risk, including via insurance coverage. But they also need to carefully use capital to maximize returns on their investments, especially as interest rates continue to rise. One way they can optimize their capital expenditures is through premium finance.

Straining Your Finances

For most insurance policies, a buyer typically makes a single upfront premium payment — or pays a majority of the premium upfront — in return for coverage over the next year. Some forms of insurance not purchased on annual basis, like project-based coverage and multiyear policies, typically also require large payments at the policy’s inception.

This traditional approach to insurance purchasing is not ideal for many companies. A large upfront payment can prevent you from reinvesting that capital in your business or putting it to use in the market. It can also limit your borrowing capacity and it doesn’t consider the possibility that your cash flow may be irregular. You might have enough cash to make a large payment today, but what if you’re short on cash in six months, just before your next renewal?

Spreading Out Your Payments

But there’s another way. Through premium finance, insurance buyers can secure coverage for critical risks with less strain on their balance sheets.

Premium finance is essentially simple lending. A premium finance company acts as a lender, paying insurance premium on your behalf. The insurer minimizes its risk by collecting premium upfront and extends coverage to you as outlined in the policy, which acts as collateral for the loan. You agree to a schedule of fixed payments to repay the lender, while also preserving capital that you can reinvest in your company or invest in the market during the life of the policy.

Premium finance can be used for virtually any line of insurance coverage, with payment plans that can be customized to meet a company’s cash flow requirements. For example, a plan could include no upfront payment and monthly or quarterly installments of up to 36 months. Aggressive, fixed interest rates, typically at or below rates offered by traditional credit facilities also allow insurance buyers to leverage low-cost capital to optimize their investment potential.

Getting Started

Any company can benefit from premium finance. But it could be especially beneficial to companies for which spreading insurance payments out could help smooth cash flow or that are concerned about insurance collateral requirements.

If your organization falls into either of these categories, premium finance could be the right approach for you. Talk to your insurance broker about how you can get started and use premium finance to reap the benefits of insurance capital while still effectively using your organization’s valuable capital.

Paul Kmiecek

US Premium Finance Practice Leader