Having a sizeable amount of cash in your company’s bank account is a great position to be in. The dilemma for brokers who have a sizeable pot of cash, however, is how to invest it wisely. Leaving it in a bank fixed deposit account earning an average 1% per annum is not making the most of their capital, and in turn, not maximising profit for their business.
In the current soft market, which has been the new normal for almost 10 years, organic growth has been difficult. Employing capital to grow by acquisition, therefore, has been a strategy used by many brokers to increase profits. But it does have its challenges.
“Over the past 10 years, I have seen many brokers successfully increase their profits by acquisition”, says PremFina MD, Aden Nguyen. “This strategy requires a lot of management and business resource to ensure successful integration of these acquisitions. Further, the competition for acquisition targets is fierce. The industry continues to consolidate, and acquisition targets become harder to find. There is also an increasing availability of cheap funds provided by multiple banks. These factors are driving up multiples, diminishing the potential return for acquiring brokers.”
In addition to these challenges, rising pressure from competitors equipped with increasingly sophisticated online platforms that enable them to steal market share and an on-going environment of low interest rates, currently at 0.5%, continue to challenge brokers’ revenue streams.
One of the more effective strategies employed by some brokers to increase returns, has been to use their cash to fund their premium finance book. It makes perfect sense. Not only do they earn significantly more on their cash, they do so from an asset class they understand well and from known customers with whom they have a relationship. In fact, by financing their loans, they gain more control over their client relationships.
These brokers drive their credit decisions, based on their understanding of their clients, and control the level of risk they want to take.
“For brokers, flexibility is a key factor”, says PremFina CEO, Bundeep Rangar. “Brokers want to access the best available technology and the ability to fund their premium finance business and having more say over their client relationships.”
This is affirmed by Bennetts MD Vince Chaney. “One of the key reasons why we partnered with PremFina was that we could fund our book from group resources, but we knew that we had access to PremFina funding to help us grow our book if we required it in the future.”
We have compared the potential increased returns to brokers who fund their own premium finance book to a traditional premium finance relationship, and bank interest.
Gross Return on Cash (Per Year)
The greater earning potential that comes with the broker becoming a lender is clear. In the given example, brokers could get up to 80% more in gross income by utilising their own cash for premium finance lending than they would potentially get from commissions received from a traditional premium financing company, and earn 98% more in gross income than they would by simply keeping their money in the bank account at 1% interest. Any transaction and support costs will, of course, need to be factored in.
The interest from premium finance lending may also be supplemented by income from additional fees, which can amount to 40% of the interest income. In the example below, this equals to as much as £1,040,000 in gross income before factoring in any associated costs.
Gross Return on Cash including Additional Fees (Per Year)
The numbers speak for themselves. If you’re interested in finding out more, email PremFina at firstname.lastname@example.org, or call us at +44 (0) 203 500 3462.