Commercial Insurance Premium Financing
Can’t Fund Your Commercial Insurance?
Here’s How You Can Make It Happen (Without The Risk!)
Paying commercial insurance premium can be rough, especially if you are a small business owner. But here’s the truth; despite your urge to resist paying for “what ifs,” you should have at least a primary commercial insurance. Heck, most of the times you must have at least a basic insurance, for the US law often requires it.
So what are your options for financing commercial insurance premium? This article discusses the possibilities of funding your commercial insurance via the premium funding method. We will go through its advantages, risks, and whether or not this is the right time to obtain it.
Should You Avoid Commercial Insurance (At All Costs?)
As a small business owner, it is difficult to watch your capital going down the drain. A bill here, a check there, an expense here, an expense there; sooner then you know it, you are left with only a fraction of profit. Suddenly, you start thinking about reducing your costs.
Understandably, you can’t avoid paying taxes because, well, the government has the power to close your business in case you don’t hold up your end of the deal. But then a devious thought comes to your mind: “Why am I paying my insurance when nothing bad has happened for over ten years now.”
You ponder around that idea and eventually cancel your insurance policy and opt for an alternative policy, one that satisfies the US law and your wallet. Was it the right move?
Insurance And The US Law
While most commercial insurances are optimal, more often than not you need to have some protection for your business. For example, if your company has employees, you are required by the US law to include workers compensation insurance. Why?
One the one hand, this policy protects your employees should they experience any trauma or injury while at the workplace or in the progression of their employment. The policy also protects you, the employer, from being sued by your employees. We discussed this in one of our previous blogs more thoroughly, but the point we made is this; never mix business needs with personal ones!
Then there is the unemployment insurance, which covers the expenses of your employees should you ever ran out of business. Yes, it sucks to even think about such an idea, but the business world is ruthless and unpredictable, and your employees should not suffer should you close your business. And what about vehicle insurance? If your firm is in possession of vehicles that are used for business reasons, they must be insured.
We could go on and on about this, and talk about insurance for independent contractors, commercial general liability insurance, and so forth, but here’s the bottom line; not having insurance could cost you more than you think (think fines and jail time.) You may accuse us of fearmongering, but unless your business is selling drugs, you should be afraid of hefty fines and jail time!
However (and this is a big HOWEVER,) what if we told you that there is a way to keep your insurance, your business, your employees and save money on the process? Too good to be true? Don’t worry; we aren’t talking about selling your soul to the devil. Two things can help you achieve these things:
Advice #1: Get The Optimal Insurance Policy
Easier said than done, right? Well, yes and know. Understandably, there are thousands of offers you could go through when you are searching for the proper commercial insurance. You need to think about your needs and ensure that the policies cover those needs.
Then you have to ensure that your needs can be met by an insurance company, for the right fee (of course.) There are two ways you can conduct this process:
1. Go Solo
Research everything you can find on commercial insurance (read blog posts, Investopedia, Wikipedia, Government insurance websites, etc.) Once you find the policies that protect your business in the adequate matter, look for companies that offer the kind of protection you need. It will be a long, tedious and frustrating process, but you’ll get through it in the end, hopefully.
2. Go With An Agent
You can go with a captive agent or independent agent. Captive agents work for one company explicitly and often have in-depth knowledge regarding the policies and prices their firms currently have in offer. On the other hand, independent agents work with numerous insurance companies.
We always suggest that you go with independent agents for they make other companies compete for you, which often results in discounts, lower premiums and fantastic and affordable bundles (assuming that the broker knows his stuff.) More importantly, an independent agent will do the job you probably want to avoid; check and compare rates, negotiate with insurance agencies and premium finance companies, and update your insurance policy.
It is imperative to update your insurance policy continually, especially if you are a business owner. Should your company grow, you will have to ensure that your insurance can protect your current and future investments, employees, vehicles and so forth.
Advice #2: Sort Out Your Financing
Costs of commercial insurance vary depending on the company that provides it, the number and type of policies you select, as well as on other mini-factors (such as risks, liability, etc.) Prices also vary from state to state, as well as on your gross sales.
We suggest that, no matter what your business is, you always opt for the General Liability Insurance.
There is a silver lining in all of this mess; commercial insurance is tax-deductible! Why? Well, the gentlepersons at the IRS define it as a cost of operating your business, assuming that the coverage is used for business reasons.
Understanding Commercial Insurance Premium Financing
Often referred to as premium funding, the commercial insurance premium financing is often selected by those that seek commercial insurance or unconventional high-risk coverage.
Now, when you are are paying the premium for your life or car insurance, you generally pay it monthly, less often quarterly.
Why? Well, it is perceived as low-risk insurance, and because of that “low-risk” factor, your insurance company arranges a payment that is favorable for you and them.
However, with high-risk insurances, companies want their money ASAP.
You can think that the insurance company lacks understanding or that they are greedy, but we must repeat that this is business and that everyone is seeking an optimal method of protecting their investment. Put yourself for a moment in the sues of an insurance company:
A client walks in and seeks extremely risky insurance. “Sure,” says the insurance company, “but only if you agree to pay the entire premium in a single payment (a lump-sum)
Why? Should the client activate claim his insurance within a couple of months (which he or she might do, due to the high-risk factor,) the insurance company will endure great financial damage. A client may activate a claim worth $500 000, even though the client has only paid 3-4 premiums that sum to a total of $10 000.
So, the insurance company asks the client to pay upfront; that way they will at least minimize the damage should things go south.
A Dead End?
Now we’ve reached the point where an insurance company isn’t willing to allow an installment payment, and the client (that would be you) doesn’t have the necessary capital to conclude a contract with the insurance company. Is this a dead end? Thankfully, no!
The commercial insurance premium financing allows the insurance company to lend you the money with which you then cover the costs of your insurance.
Naturally, it wouldn’t make sense that insurance company lends you their money.
Instead, they bring a new player to this whole arrangement, generally a third-party premium finance company.
You then sign what is called a premium finance agreement.
You work out this agreement together with your insurance company and the premium finance company, which is our third-party player. It’s actually quite beautiful how this whole arrangement works:
1. You sign an agreement with the third player. You determine the size of the loan and all the nitty-gritty financing details. The duration of the credit depends on the contract; it can last one your, five years or for the entire period of the policy.
2. The premium finance company then finances your insurance entirely. At this point, your insurance company got what they want, and you are eligible to file claims.
3. All that is left is your agreement with the premium finance company. Usually, they bill your company in monthly or quarterly installments. Like any loan, you will have to pay an interest rate, but at least you didn’t empty out your bank account to finance your insurance.
Why The Need For A Third-Party Player?
As we said, most insurers avoid financing your premium due to the risks we already mentioned. More importantly, they aren’t an insurance company, not a bank or other lending entity. Understandably, you as a business owner probably don’t want to spend a massive amount of money immediately, right?
You are a business owner, always looking to expand, hire more workers, branch out, invest in marketing, and so forth. Moreover, maybe you don’t have that amount of cash at your disposal. However, the fact remains that you want and often must ensure your company to abide the law and have a peace of mind.
How Do These Third Party Entities Function?
Premium finance companies conduct their business like any other lending entities (think banks and credit unions.) They satisfy the insurer’s financial appetite in a one-time payment. On the other hand, the premium finance company gives you the opportunity to pay them in monthly installments.
You get your insurance, the insurer gets its money, and the premium finance company makes a profit via interest rates. Makes sense, right? Naturally, all premium finance companies require that you put a down payment on your insurance, which is generally set at 25%, sometimes more, sometimes less. Still, better 25% than 100%, right?
Who Is Eligible For A Premium Funding?
It can be tricky to find the right financing partner when it comes to premium funding. Again, this is one of those solo vs. broker situations.
Ideally, you should work with an independent broker for they are often in contact with various premium financing companies.
You could also work with a captive agent, in case you already found your ideal insurance company.
You may not want to hear this, but it is highly recommended that you work this thing out with an agent.
Finding the right insurance is one thing, but when it comes to premium funding, you also have to find the right premium finance company.
Remember, insurer and premium financer are, in this case, two separate entities that conduct their business as they see fit. Generally speaking, premium funding is granted to business owners and entrepreneurs that are between 29 to 75 years old. Also, a potential client is often worth at least $5 million.
Benefits Of Commercial Insurance Premium Financing
There are numerous benefits to the commercial insurance premium financing. We already mentioned the most obvious advantage; it enables you to avoid a massive up-front payment. With that money, you can operate your business as you did before, even expand.
Furthermore, these deals are often very flexible and allow you to attach several other insurance policies to it. In essence, you can arrange a deal in such a way that is the most convenient for you, allowing you to pay all policies with one monthly payment.
You will also be able to take a look at the details of your financing whenever you want.
This level of transparency is often achieved with the help of independent agents; they work out the details of the agreement with you, then hand over the contract to the premium finance company.
Most importantly, the insurance company is billed regularly and according to the law.
Most importantly, this type of financing doesn’t force you to endanger your business or liquidate your assets. And here’s the most beautiful part of this whole operation; you aren’t paying the insurance with your own money.
Instead, you are financing it with other people’s money (this is known as the lender’s capital.)
Of course, this doesn’t mean that you are off the hook should the whole deal fall apart. However, you will have the right to retain a pretty substantial sum of capital (this is known as the retained capital.)
So, this must sound like a dream deal for you, right? Well, now it’s time we discuss the downsides of commercial premium funding.
Downsides Of Commercial Insurance Premium Financing
To better understand the downsides, we arranged this sector in several sub-headings. Go through them carefully to avoid any confusion, and more importantly, to understand the risks of premium financing.
Not everything is perfect in the world of premium funding. For starters, they are expensive, mostly due to the high-interest rate. How high? Technically speaking, premium financing companies aren’t your regular banks or credit unions. Consequently, they aren’t regulated by the US regulatory agencies, which grants them full autonomy when it comes to determining the interest rates.
More often than not, premium finance companies embrace the lack of regulation and set the rates anywhere between 10% and 20%. Some even go as far as 25 or 30%. The only good news is that there is a lot of competition in this specific financing sector, which means that you have plenty of companies to browse through.
Moreover, should you work in independent agents, they will often find the optimal premium financing company and even lower the interest rate for you (if they are skilled, naturally.)
Changing Interest Rates
An interest rate is nothing more than a fee, a sum of money you pay to an entity that borrowed you the money. As with any other service in the free economy, the rate of interest rates depends on supply and demand philosophy.
If the interest rate becomes too high, and if you aren’t able to finance it, there is a possibility of losing your insurance. You will also have to pay the debt, which will increase the more you delay it.
Other Known Risks
There are other risks involved with premium funding. For instance, let’s say that everything went well; the insurer got their money, and you paid the loan according to the contract. Presumably, you wouldn’t like to renew the contract. Well, the premium financing company can freely conclude the deal and call it a day.
In such situations, you would have to seek a new premium financing company ASAP if you want to keep your insurance. There are also other risks, mostly related to credit score and credit spread risk (you can read more about them here.) Thankfully, all these risks can be avoided if you partner with the credible and respectable company.
The Good News
Today, premium financing is shifting from unregulated to a regulated industry. These are bad news for the companies, but excellent news for clients such as yourself.
For example, all companies that offer premium financing services must be approved by carriers. Furthermore, they have to be rich and have billions and billions of dollars in assets. Why?
Well, this ensures not only the credibility of the lending company but also secures that they can hold up their end of the deal, pay the premiums, and withstand financial tremors. Moreover, regulators work hard to prevent situations where the loan (together with interest rates) doesn’t exceed the cash value of the insurance.
There are risks, and there will always be risks with the premium funding, but it’s nice to see that the regulatory agencies are working hard to prevent irregularities and unfair transactions.
They are also working hard to make the deals more transparent, allowing you to have in-depth insight into your purchases.
Should You Try The Premium Funding?
It depends. If you have very little understanding of what was said in this article, but you still want to arrange a premium funding deal, then no, we can’t recommend it.
Even if you know a lot about premium funding, do you really want to conduct this business on your own? No offense, but should you risk the financial existence of you and that of your employees like that?
However, if you manage to find the right agent, then yes, go for it. But, it has to be THE RIGHT AGENT! It has to be an agent that understands you and your firm, its needs, and preferences. Yes, we are offering independent agent services, but any unbiased financial advisor will tell you that these kinds of deals require expertise and experience.
Remember, IPA is an independent insurance agency, and we make a living by providing our clients with the optimal insurance, preferably on a long-term basis.
Putting our clients in a dire financial situation doesn’t only poorly reflect on our image, but also on our finance.
Any serious independent insurance agency will try to establish a personal and long-term relationship with their clients, and we are no different from these agencies.
Whether you use our services or not, please, take into account everything that we said in this post, for it can make a difference between a successful and disastrous outcome.
Commercial insurance premium financing has tremendous potential, but it is up to you to utilize that potential accordingly. The benefits outweigh the downsides, for this type of funding allows you to avoid paying massive one-time fees to the insurance company.
Most importantly, you get your insurance and can conduct your business as you see fit.
Make sure that you find the right policies, and that you work with respectable insurers and commercial insurance premium company.
Ideally, you should arrange a meeting with an independent agent that will understand your needs and take care of the tedious paperwork, allowing you to focus your time and energy on your firm and employees.
Those that dwell in the State of Arizona feel free to contact us for any information regarding this or any other insurance-related topic; we’ll happily answer your calls and meet your specific needs!