Mark Wooldridge looks at what attracts SMEs to premium financing
It is widely held that the premium funding market has grown substantially in the past five years to a level now in excess of £4bn.
My view as a funder with more than 10 years' experience is that the premium funding levels have quadrupled in the past five years with SME business now making up at least half of this total.
So why has this market grown so rapidly and what in particular attracts SMEs to this form of finance? There are many factors:
- SME cash flow. Why pay up front when funding is readily available at attractive interest rates?
The biggest obstacle to premium funders at SME level is bank overdraft rates.
- Another line of credit. Why use up a finite resource like your overdraft, when an extra option is available.
- Broker cash flow/income. Brokers used to use premium funding as a vehicle to allow their SME clients to spread the cost of their insurance package, which happened to give the broker additional cash flow.
With the increased interest from SME clients the situation has been turned on its head with some brokers relying on this section of the market for their cash flow.
- Market maturity. As this market has matured both the seller (insurance broker) and the buyer (SME) have become more comfortable with the concept of using premium funders. Most premium funders, after all, have very strong 'parentage' (typically large financial institutions) which seems to play a part in the decision made by SMEs to adopt this finance option.
While the premium funding market has seen dramatic growth in the past five years or so, the level of premium funding is still only a relatively small percentage of the commercial insurance business written.
The value of the UK commercial insurance market is believed to be in excess of £16bn.
Will this level of growth be sustained? Well, there is plenty of room to do so. Premium funders currently fund less than a quarter of the potential commercial market, which leaves a large chunk of the market for expansion.
With the incentives to finance outlined above, it is hard to see why this expansion would not continue.
An area to watch over the coming months and years may be the increasing use of premium funders by insurers.
There has been much discussion in this quarter of outsourcing, non-core operations, perhaps an inevitable result of the increase in regulation.
We have already seen a polarisation within the market as brokers, in the main, have moved away from their own funding schemes.
It won't be long before insurers value the increased cash flow that brokers and some SMEs are already enjoying as more beneficial than the perceived control that possession of a direct debit mandate affords.
SMEs make up over 90% of all UK enterprises and there is undoubtedly huge potential within the SME market to increase the business funded by Amber Credit and its competitors, thereby also increasing broker income.
The European Commission's definition of SME is: "The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR50m, and/or an annual balance sheet total not exceeding EUR43m."
Extract of Article Two of the Annex of Recommendation 2003/361/EC.