What exactly is Premium Finance - A detailed breakdown
Many corporate and large commercial entities (mine's, manufacturing, logistics entities, airlines, corporate farming operations, professional service businesses, government organisations etc.) have very complicated insurance policies that involve large premiums, significant deductibles, various lines of cover, several insurers, differing limits and many extensions.
Due to the complexity and size of these insurance policies, entities are often required to pay over their insurance premium to the insurers annually, in advance. Annual advance's payable by corporate's often tend to put stress on cashflow or result in having to part with "lazy capital" into non-revenue generating activities. Premium Finance was born out of this anomaly whereby it makes sense for large scale financiers to step in and fund the annual insurance premiums on behalf of the client which allows a more cost effective and capital efficient mechanism of paying for this expense.
Whilst Premium Finance has been around in South Africa for many years, its low market awareness has resulted in the slow uptake of the product versus the more developed insurance markets whereby Premium Finance is successfully considered on each and every policy provided by brokers. Both the United States & the United Kingdom Premium Finance markets account for approximately $50bn & £9bn of annual premium financed respectively. Whilst the local market still remains relatively untapped, the businesses that have been introduced to the product by brokers have identified with the significant advantages of utilizing Premium Finance as an integral part of their funding and treasury strategy.
Whilst the benefits associated with this form of funding are extensive, companies easily identify with the need for Premium Financing based on the following key attractions:
· Liquidity - Tying up cash flow in non-revenue generating assets can lead to capital inefficiency (i.e. this capital could be utilized more effectively within other parts of the business or through investing in revenue producing assets),
· Vat benefit - Corporations are able to claim the full input VAT on the annual insurance policy whilst paying off the annual Premium Finance policy in monthly instalments,
· Profitability - The size, spread of risk and capital availability of Premium Finance companies results in the cost of funding on Premium Finance contracts in most cases being significantly cheaper than most businesses inherent cost of borrowing and/or opportunity cost of capital,
· Security - Outside of the policy, no additional security, pledges or collateral is required for Premium Finance. This results in corporate's being able to utilize their assets or collateral for alternate funding arrangements or needs,
· Simplicity - The Premium Financier combines everything into one simple monthly repayment by taking ownership of the admin and complexity of paying various insurer's, allocating premium's and reconciling endorsements. .
“Premium Finance is the financing of annual insurance policies whereby the financier pays the annual insurance premium upfront and then collect's this amount (plus interest) over the term of the policy”
Premium Finance Partners brings a wealth of experience, expertise and knowledge into the local Premium Finance market. With over a decade of experience in this field and the most sophisticated administration platform, Premium Finance Partners is here to provide all corporations with a highly professional and efficient premium funding mechanism.