For firms planning to invest in growth, financing those investments may prove challenging. This situation may require business leaders to find new ways to free up funds.
The challenges of assessing finance
Securing debt finance through traditional routes is currently a real challenge for UK SMEs.
Recent research found UK SMEs struggling with a funding crunch. 59% said access to the finance they need to invest in growth is more difficult now than it has been for five years. In fact, 43% say it is one of the biggest challenges they face this year. And 73% complain that institutional lenders have failed to take the time to understand their businesses.1
Moreover, those who successfully secure funds for capital investment through traditional routes will likely face comparatively high rates of interest. Those rates come thanks to a combination of a base rate standing at 5.25%2 and banks pricing a ’risk premium’ into finance for SMEs.3
With capital injection at the heart of firms’ plans - 71% report that they’re looking for funding to accelerate expansion. This is a situation that will leave many seeking new ways to free up working capital to invest in growth.
Premium finance: A route to growth funding?
In response, more and more SMEs are looking at premium finance as a means to free up working capital and manage costs.4
But what is premium finance and how can it play a role in supporting firms’ capital investment plans?
What is premium finance?
In simple terms, premium finance is a way to spread the cost of insurance, enabling premiums to be paid by monthly instalment, rather than a single up-front payment.
A lender provides the funds to pay premiums up front, then collects regular monthly payments plus interest. This arrangement will be familiar to most people with home and motor insurance.
However, the benefits of this approach when it comes to business insurance can reach far beyond simply avoiding a large, single payment for insurance premiums. For SMEs, premium finance can have positive impacts on your business’ cash flow, tax, and balance sheet. It and can play an important role if you’re struggling to access finance.
The growth benefits of premium finance
For businesses seeking to invest in growth, using a premium finance arrangement to cover insurance premiums can have a range of benefits including:
1. Improved cash flow
Avoiding large up front insurance premium payments can improve cash flow, and free up working capital to invest in growth, all without impacting your business’s line of credit.
2. Tax relief
Premium finance interest payments are tax deductible, which can help to further release working capital by reducing your firm’s tax liabilities. This tax relief may not apply to all businesses, so you should seek your own advice.
3. A healthier balance sheet
It is also possible to classify premium finance payments as off-balance sheet. This can improve your business's overall financial position, free up capacity to invest in growth, and make it easier to access debt finance.
4. Rapid access
What’s more, premium finance applications are typically approved quickly. Thereby offering rapid access to finance, compared with the weeks or months it can take to secure funding from lenders.
On top of that, premium finance can also create administrative efficiencies. A single premium finance arrangement can be used to cover the cost of multiple insurance policies, paid for via a single monthly payment.
How does premium finance compare?
For businesses seeking to invest in growth but struggling to access funding, all this makes premium finance so much more than a way to spread the cost of insurance. In fact, as the table below demonstrates, it compares favourably to many of the more traditional sources of debt finance for SMEs:
| Comparison based on £13.5k premium | Premium finance5 | Business overdraft6 | Credit card7 | Business loan8 |
| APR% | 17.56% | 29.50% | 29.80% | 12.37% |
| Fixed rate of interest | Y | Y | N | Y |
| Fixed end date | Y | N | N | Y |
| Guaranteed acceptance* | Y | N | N | N |
| Unsecured | Y | Y | Y | N |
| Held off balance sheet | Y | N | N | N |
| Potential tax relief | Y (on interest) | N | N | N |
*Subject to affordability and customer due diligence checks.
The bottom line is that premium finance can provide an efficient, convenient alternative route to funds.
This is particularly useful if your business pays higher insurance premiums, or you’re seeking to manage cash flow, or free up funds for investment.
At a time when many firms are looking to invest in growth but face limited access to traditional funding, this could provide a valuable alternative. However, seeking advice from a broker is an essential first step.
Here to help
If you’d like to find out more about premium finance, discuss your needs, or and how it could help support your business growth, get in touch with a Marsh Commercial advisor for expert guidance and support.
Sources
1. assetfinanceinternational.com/22972-uk-smes-unable-to-access-financing-needed-to-grow-amid-economic-uncertainty
2. bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/february
3. icaew.com/access-to-finance-high-hurdles-for-smes
4. insuranceage.co.uk/premium-finance-brings-businesses-benefits-beyond-instalments
5. Close Brothers Premium Finance, 4 December 2023
6. Barclays Business Overdraft web pages. This information was accurate on 4 December 2023 but is subject to change.
7. Santander Credit Card options web pages. This information was accurate on 4 December 2023 but is subject to change.
8. NatWest Business Loans web pages. This information was accurate on 4 December 2023 but is subject to change.
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