Australian consumers are regularly offered the option to manage their payments on a monthly basis – for utility bills, vehicle registration, instalment plans on major purchases, health insurance and even their life insurance premiums. This takes some of the pain out of personal budgeting.
But it’s a different story for small to medium businesses (SMEs). Even though their revenue may be cyclical or seasonal, they’re still expected to plan for major costs which only occur annually. Yearly invoices for items like fleet registration renewals, accounting and audit fees, and the big ones – annual premiums for property, vehicles, workers’ compensation, public liability, professional indemnity, business interruption and possibly credit insurance – may land in a small business owner’s in-tray all at once.
However, there is a solution, in the shape of insurance premium funding, also known as premium financing. SMEs can arrange their cover through their insurance broker as normal, but the annual premium invoices are paid by their finance provider. The loan to cover the premium costs is repaid by the business in monthly instalments, providing many tangible benefits:
Spread the cost
Instead of being hit with a stack of bills all at once, you can even up the cost throughout the year, making budgeting and cash flow forecasting much easier.
Simplify your accounting
You may be able to aggregate a number of separate premiums into a single loan. This will make your accounting less complicated, since you will only need to make one monthly payment instead of several payments.
Predictable monthly instalments
Once you have organised your premium funding loan, you know exactly how much cash you need to come up with each month in order to cover all your insurance needs. If your revenue is seasonal, it may be possible to spread the loan repayments into periods and amounts which harmonise with your revenue cycle, rather than paying equal monthly instalments.
Lock in the interest rate
This may not seem like much of a benefit in the current low-interest rate environment, but it’s still reassuring to know that your loan will have a fixed interest rate. You can get on with running your business in the knowledge that there will be no unpleasant surprises.
Tax-deductible interest cost
Although taking out a loan to finance your insurance premiums does mean that your cost will be higher, as a result of interest charges and any loan establishment fee, the interest and fees you pay will be tax-deductible business costs.
Free up cash flow
This is the major benefit. Funding your insurance premiums puts you back in control of your business cash flow. You’ll be able to continue purchasing inventory and materials, as well as paying your employees and suppliers without interruption. You might even be able to invest in assets to grow your business.