The main advantage of premium financing is that it can provide greater financial flexibility by freeing up cash flow that would otherwise be tied up in large, lump-sum premium payments. This can be particularly beneficial for businesses that need to maintain liquidity for other investments or operational expenses.
When entering a premium finance agreement, the policyholder pays interest on the loan, and the insurance policy usually serves as collateral. If the policyholder fails to make the required payments, the premium finance company may cancel the policy and use any unearned premiums to pay off the outstanding loan balance. It’s essential to carefully consider the costs and benefits of premium financing and compare it to other financing options available before making a decision.