February 17th 2021

The importance of down payments for premium finance contracts

Hi Brokers!

I'm regularly asked to lower down payments for premium finance contracts, so I thought I'd quickly share the rationale behind requiring one and to give an idea of the impact of lowering one.

Firstly it is important to note that our business model at IFS does not include asking the broker to pay any bad debt incurred as a result of a client refusing to pay any monies due to us under the terms of the finance contract. We're here to protect your agency bill receivables, one and done.

  1. The downpayment is required so that if the policy is cancelled for any reason at any time during the policy term, not only can we recover the cancellation credit from the carrier to pay off some of the loan, but there is money already on hand to offset any remaining outstanding balance as there is a likely a difference between time on risk and when the client stopped paying us. Any surplus amount is then sent back to the brokerage.
  2. The larger the down payment, the more flexibility we have in making repayment arrangements if the client defaults on payment. This can help greatly with client retention(yours and ours).
  3. Probably most importantly, the down payment needs to be equal to or more than the policies minimum retained premium. e.g. many commercial policies have a 25% MRP, if the policy is cancelled 1 month in, we'll only get approx 9 months of cancellation credit back instead of 11 (on a 12 month policy term), leaving an oustanding balance to settle.

I have come across many situations where a broker tells me that they can get financing elsewhere with a lower down payment than the MRP. Just make sure that as a broker you protect yourself and your brokerage by asking the question of who has to pay for the shortfall if the client defaults on payment, the premium finance company or the broker!

Our standard plan at IFS is 25% down and 9 installments. We can of course customise both the downpayment and the number of payments for you, however the actual cost of financing for the client will be more as there will be more money financed over a longer time period. Cost aside, we can work with you within the parameters outlined above.

Quick Note: We cannot finance policies with 100% MRP or bonds as there is no return premium from carrriers upon cancellation.

Please let me know if you have any further questions about downpayments or premium financing in general. Hope you found this artice somewhat informative.

Take care and stay safe,

Ian McMahon

Ontario Business Development Manager