Premium funding for business insurance in Australia: what monthly instalments really cost
How premium funding works for Australian business insurance, flat versus reducing rates, worked cost examples, cancellation and default risks, and alternatives.
Premium funding lets a business pay its insurance in monthly instalments: a finance company (the premium funder) pays the insurer the full annual premium, and you repay the funder, usually over 10 or 12 months, with interest and sometimes an establishment fee. It helps cash flow, but it is a loan. Compare the total amount payable in the funding contract with the upfront premium, check whether the rate is quoted as a flat rate (which costs more than it sounds), and understand that the funder can usually cancel your policy if you miss payments, which would leave the business uninsured.
This guide is part of the business insurance quote checklist. Figures are illustrative, not current market rates. Add the funding cost to each quote when you compare quotes, and ask the questions in broker or direct about who arranges the funding.
How a premium funding arrangement works
- Your broker or insurer quotes the annual premium, including GST and stamp duty.
- You sign a premium funding contract with the funder, often through the broker.
- The funder pays the premium to the insurer or broker straight away.
- You repay the funder by direct debit in equal instalments.
- The contract usually gives the funder the right to cancel the policy if you default, and to receive any refund of premium.
Because the credit is for business purposes, premium funding is generally not regulated by the National Credit Code, which covers credit provided wholly or predominantly for personal, domestic or household purposes. You will not get the consumer credit protections, so read the contract carefully.
Worked example: three ways to pay $5,200
An illustrative annual premium of $5,200, including GST and stamp duty.
| Option | How the cost is worked out | Total paid | Extra over paying upfront |
|---|---|---|---|
| Pay upfront | $5,200 | $5,200.00 | – |
| Funder, 12% a year reducing balance, 10 instalments, $50 fee | Instalment $549.03 x 10 = $5,490.27, plus $50 | $5,540.27 | $340.27 |
| Funder, 6% flat, 10 instalments, $50 fee | Interest $5,200 x 6% x 10/12 = $260; ($5,200 + $260) / 10 = $546.00 a month, plus $50 | $5,510.00 | $310.00 |
The flat rate looks like half the reducing rate, but it is charged on the full $5,200 for all 10 months even though you are repaying it month by month. Converted to a reducing-balance rate, 6% flat over 10 months is roughly 10.8% a year. Use the premium funding calculator with the reducing rate to compare offers fairly, or compare the total payable figures directly.
Is the interest worth it?
Compare the funding cost with the cost of the money you would otherwise use:
- If the business has cash earning little in an account, paying upfront usually costs less.
- If paying upfront would mean drawing on an overdraft or credit card at a higher rate, funding may be cheaper.
- If paying upfront would leave you short for wages or GST, the convenience may be worth the cost.
Illustrative comparison: drawing $5,200 from an overdraft at 14% a year and repaying it evenly over 10 months costs roughly the same as funding at 14% reducing balance. Funding at 12% reducing balance would then be slightly cheaper.
Interest on premium funding used for business insurance is generally a deductible business expense. The funding itself is a financial supply, so there is generally no GST on the interest.
What happens if you cancel or default
If you miss a payment, the funder will usually send a notice and, if the default is not fixed, use its power under the contract to cancel the policy. Once cancelled, you have no cover from the cancellation date. Some funders charge dishonour and default fees.
If you cancel the policy mid-year, the insurer refunds the unearned premium (less any cancellation fee and non-refundable fees) to the funder, not to you. If the refund is less than what you still owe, you pay the difference.
Illustrative example: you sell the business four months into the $5,200 policy funded at 12% reducing over 10 months.
- Balance still owed to the funder after four instalments: about $3,181.87
- Pro-rata refund for 8 of 12 months: $5,200 x 8/12 = $3,466.67
- Less an illustrative insurer cancellation fee and non-refundable broker fee totalling $210: refund $3,256.67
- Refund applied to the balance: $3,256.67 - $3,181.87 = $74.80 left over for you
If a large part of the premium was non-refundable, or there was a minimum premium, you could instead owe money after the policy has ended.
Questions to ask before signing
- What is the total amount payable, including fees?
- Is the rate flat or reducing balance?
- How many instalments, and when is the first one due?
- What are the dishonour, default and early payout fees?
- How much notice will I get before the policy is cancelled for non-payment?
- Does the broker receive a commission from the funder? (This should be disclosed.)
- Can several policies be funded under one contract, and what happens to all of them if I default?
Alternatives to premium funding
| Alternative | How it works | Watch out for |
|---|---|---|
| Insurer's own monthly payment option | Some insurers offer monthly direct debit for smaller business policies | May include a loading over the annual price |
| Pay upfront from cash reserves | No interest | Cash-flow impact |
| Separate business loan or overdraft | Use existing finance | Rate and fees on that facility |
| Align renewal dates | Spread several policies across the year | Different renewal dates to track |
Frequently asked questions
Is premium funding the same as paying the insurer monthly?
Not quite. Premium funding is a separate loan from a finance company. Some insurers offer their own instalment option, which may have different terms.
Will funding affect my claims?
A claim is handled by the insurer as normal while the policy is in force. If the policy is cancelled for non-payment, claims after cancellation are not covered.
Can I pay out a funding contract early?
Usually yes. Check the early payout terms and fees, especially for flat-rate contracts.
Does the broker earn commission on funding?
Brokers may receive a commission from the funder. Ask for it to be disclosed in writing.
Sources
- ASIC — broker licensing and disclosure of remuneration
- ASIC Moneysmart — understanding interest rates and loan costs
- Australian Taxation Office — deductibility of business interest and GST on financial supplies
- AFCA — complaints about credit and insurance for small businesses
