For those firms planning to invest in growth, financing those investments may prove challenging, and may demand business leaders find new ways to free up funds.
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
What’s more, those who are successful in securing funds for capital investment through traditional routes will almost certainly find themselves paying 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.
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?
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 – and can play an important role if you’re struggling to access finance.
For businesses seeking to invest in growth, using a premium finance arrangement to cover insurance premiums can have a range of benefits including:
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.
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 seeking to invest in growth, but access to traditional funding is limited, it could provide a valuable alternative, though seeking advice from a broker is an essential first step.
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.
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