Generating cash to meet overhead, payroll and other monthly expenses gets more difficult when business takes a turn. No matter what the industry, when work slows down, accounts receivables can get stretched from 30 days to 45 or 60 and even beyond that. That’s why it’s important to stay on top of it at all times.
The Rainy Day Scenario
For most of Maxwell’s 15 years in the pipeline business in South Louisiana, cash flow has not been one of his company’s biggest challenges. But nothing could have prepared him for what’s happening now.
Oil prices have fallen from more than $100 a barrel in 2014 to about $37 a barrel in early 2016. Low oil prices mean less drilling rigs and less pipelines. Maxwell’s company has been fortunate enough to hold on to enough existing accounts that he has only had to lay off a handful of workers. Some of the cash flow decisions he made several years ago, including commercial insurance premium financing, are allowing him to leverage his assets for other business-critical needs. This year his local banker gave him an even bigger boost.
In early 2016, Maxwell’s banker asked to see the renewal notice for his $20,000 insurance policy, which required 20 percent down and nine monthly installments with a 6.8 percent interest rate. His banker was able to cut the down-payment to 10 percent and extend payments over 10 months with a 5.125 percent interest rate.
What You Don’t Know Can Hurt You
It’s safe to assume many businesses have not been as savvy as Maxwell when it comes to managing their cash flow. In fact, Keith Leonard, City President for MidSouth Bank in Morgan City, La., says about 40 percent of business owners are still paying their commercial insurance premiums in one lump sum out of the company’s operating budget. Many still believe paying the premium outright saves them money, but that’s not the case when you look at the whole picture, Leonard insists.
“Lots of businesses don’t know that banks offer this product — and often times we offer a more competitive rate,” Leonard says. Another big plus are the conveniences of doing business with the bank you already have a relationship with, including dropping off payments on the due date. “Most customers prefer to call their local banker about an issue with their insurance rather than have to call some unknown company from who knows where.”
Leonard says MidSouth Bank had one client who was paying his annual $240,000 premium in one lump sum and another who was paying a $10,000 premium in full. For the latter company, MidSouth Bank was able to offer a financing package that required only 10 percent down with a 5.8 percent interest rate, and nine payments of $928.54. The total cost of financing? Just $245.
Insurance premium financing is one of many possible solutions to preserving cash flow. Ask your local banker about this product that can keep your company going — and possibly growing — when times get tough.