Australia’s business community has seen a variety of challenges in recent years only to be beset by others.
The lockdowns, supply chain constrictions and disrupted business operations that defined the COVID-19 era have subsided. But in their place have come rising inflation and interest rates, both of which have put the squeeze on households and businesses across the country.
The cash that was readily available to borrowers during the COVID years has become more expensive than what we’re accustomed to. And it’s about to become more so.
“2020-2022 were years in which businesses had to tread water because they were dealing with continuous change,” says Hunter Premium Funding (HPF) CFO Beau Goodyear.
“On the other hand, 2023 is set to be the year of cash flow management. Businesses have to prioritise effective cash flow management if they’re to navigate the volatility in the economy at the moment – and so they can maximise their earning potential.”
At the same time, Goodyear says ineffective cash flow management can be hard for businesses to recover from.
“When you’ve got high interest rates on debt, supply chain disruptions, wage increases, and other pressures, it can be really hard for businesses to keep meeting their insurance payment obligations.”
The state of play
Australia's Reserve Bank has listed the official cash rate 10 consecutive times in an effort to tame soaring inflation, including 4 instances when it lifted rates by 50 basis points.
Australia is far from being out of the ordinary in its attempts to slow down spending and restore inflation to market norms of 2-3%. The Russia-Ukraine conflict has been a major contributor to runaway inflation and no major economy has been immune to the resulting supply chain issues.
“Demand has returned now that that we’re in a post-COVID environment, but supply is still impacted,” Goodyear explains. “That’s what’s driving inflationary pressures both here and overseas.”
The impact that inflation is having on insurance is something all businesses need to consider.
Because inflationary pressures affect the base value of assets, borrowers may be unaware of the exposure this creates. For example, a home might be insured for $200K. However, with recent increases in the cost of building supplies, the replacement cost might now be $250K, leaving a 25% uninsured gap.
Inflation means homeowners and business owners are looking at substantial premium increases to make sure their insured assets are adequately covered.
“In the small-medium business realm, if an organisation has a $10-15K combined insurance, they could be looking at a premium increase to as much as $20-25K this year,” Goodyear explains.
“In our portfolio we’re seeing an increase of 15% in premiums funded. Our average loan size is approximately $26K, which is a significant cost to mitigate risk.”
Easing cash flow pressures
The typical Australian small business operates for a third of the year in negative cash flow. These are businesses that need to manage their cash flow carefully. An unforeseen increase in their insurance payments, typically one of their biggest annual expenses, can really disrupt their cash flow management.
It’s why a premium funding solution can be a very attractive proposition for businesses needing to retain full insurance cover.
“If you’re a broker approaching your client about a 10-15% premium increase, there is an opportunity to present a payment solution to curb that impact,” Goodyear says.
Premium funding gives businesses the ability to pay their insurance premiums in regular instalments, rather than in one large lump sum payment. It frees up cash flow, gives businesses greater flexibility and, importantly, ensures clients can afford the insurances they require.
Goodyear says brokers should give HPF’s cash flow management tool close consideration. A significant advantage offered by the tool is that both the interest rate and loan repayments are fixed, meaning that clients are protected from further interest rate increases and have the confidence to effectively manage their future cash flow projections.
Additionally, premium funding doesn’t expose businesses or directors by requiring collateral or guarantees to provide the financing product.
Goodyear says the non-financial components of the HPF offering are a key differentiator.
“We have a sophisticated complaint handling, financial hardship, and vulnerability process,” Goodyear explains. “We pride ourselves on the fact that when a client calls us, the customer service operator they speak to has the tools to help them and they’re empowered to make effective decisions.”
He says HPF is close to unveiling a new suite of customer communications built off the back of complaints and hardship data that will assist in the implementation of a prompt and effective financial hardship plan if one is needed.
Insurance during tough times
Goodyear explains that insurance is the cover that businesses can’t afford not to have.
“If the last few years have taught us anything, it’s that businesses need to protect themselves against extreme weather events and unforeseen events like supply chain constraints and business interruptions.”
“It’s particularly important for small-to-medium businesses that don’t have the capital to prop themselves up in a downturn.”
The good news is that premium funding exists as a valuable and efficient cash flow management tool available to clients of insurance brokers to manage their risk during challenging times.
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The information contained within this article is of a general nature. While all reasonable care has been taken, Hunter Premium Funding accepts no responsibility for any loss, expense, or liability which you may incur from using or relying on this information.
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