The Power of Leverage

Simply stated, premium financing allows the insured to take advantage of increased money management and funding opportunities that otherwise would not be available to their company. It also provides the insurance agent with the ability to offer coverage that the insured may not initially be able to take advantage of.

Here's how...

The Power of Leverage

Leverage is using other people's money (OPM) or credit to enhance one's financial capacity. Most people are familiar with the concept of buying a home using a mortgage. By using a finance company to provide us with the funding we need, we are able to purchase the home of our choice when we want to buy it. In exchange, the finance company accepts a much lower down payment up front and allows you to spread the actual cost of the home and an interest fee out over time. If financing capabilities were not available, we would only be able to buy homes for the amount of money that we had on hand. This would probably mean we would have to buy much smaller homes or have to put off purchasing our homes until we had saved the entire price of the house. Buying a home with a down payment and a loan allows us to live more comfortably and be more flexible in how we manage our money.

The same is true in business. If an entrepreneur could only purchased inventory with the cash the business had on hand, he or she could miss out on many opportunities to grow and expand their operations. With leverage, a business can borrow money, pay a moderate interest rate and turn additional goods and services into additional revenue making a nice margin for the entrepreneur.

It's the same for insurance premiums, but with one very special exception...financing your insurance premiums allows the insured to take advantage of what is known as Off-Balance Sheet Financing.

Off-Balance Sheet Financing

For insureds, premium financing allows the monthly-cash-flow business to more evenly manage their cash flow without having to tap into their usual credit sources. Their business may have a line of credit or other credit agreement with a bank that calls for inventory, receivables and/or property to be pledged as collateral. However, banks do not ask for insurance policies to be pledged even though insurance is an asset that can be used to obtain cash for a business. So insureds can use that resource without affecting their existing credit resources. It is known as "off-balance sheet financing".

In addition, the charges associated with the premium finance portion of an insured's commercial or business insurance loan are generally tax deductible. (Insured should check with their tax specialist for details.)

In light of this information, one could ask "Why would an insured pay cash for their premiums when they can make a down payment and use the rest of the cash in their business for profitable returns?" Why would you want to reduce your normal line of credit or impact your cash flow? The informed answer is that you wouldn't.

The insured's best use of leverage in this instance would be to preserve their cash flow and credit capacity for other business needs, whether planned or unplanned, to increase their return on investment.

How Much Can Your Insured Save?

Our clients can show their insureds exactly how much they can save in just a matter of seconds by simply going to www.upac.com, opening the Quote section and select the Cash Flow Calculator. Fill in the information and press "calculate". That's all there is to it. You can show your insureds the actual savings, in dollars and cents, that they can gain using the power of leverage while at the same time preserving their cash flow and credit capacities for other business needs. And as their insurance agent, you strengthen your relationship with them as a trusted advisor.

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