One of the most common and vexing problems faced by all small business owners is managing cash flow. This is especially true for independent insurance agencies where business income is cyclical but business expenses are not. Every business owner knows what it is like to face times when cash is tight. It can be tempting during such times to start paying bills late. But it is a bad idea to pay your bills late especially to your insurance carrier partners.
Why Paying on Time Makes Sense
The cost of paying on time is fairly low compared to almost anything else you can to do to maintain a good reputation in any business community. The insurance industry, where everybody seems to know everybody else, is certainly no exception. Putting the fiduciary aspect of insurance premium collection aside, when you pay late, you kick your cash problem down the road a few weeks or months at great cost to your credibility. You know you will have to pay the premium to the carrier eventually so by putting the payment off past the date due you gain nothing but risk losing your good reputation.
Maintaining a good relationship with your carrier partners is one of the most important things an independent agent can do to ensure the long term success of his or her business. When market conditions change and loss ratios worsen, insurance carriers will often look to reduce their active agency appointments. Payment history is absolutely one of the major factors they will look at during those times. When an insurance carrier is putting together a new program or looking to expand into a new territory they will look to partner with insurance agencies they know they can rely on (hint, those are not the ones that have a reputation for paying late). If things get bad enough and an agency has gained a reputation for paying late they could even lose a carrier appointment for that reason alone. People talk (especially in the insurance industry) and that is not a label that any agent wants to have associated with their good name.
Getting a Payment Cushion
Paying on time can act like a rainy day fund when your agency faces a major problem like losing a large client or having a horrible sales month. If you have paid your insurance carrier partners promptly over the years you will have built up a substantial reservoir of goodwill. They are likely to support you when you can’t pay on time if you can show them a plan to solve your temporary cash problem.
An even better cushion would be to secure a business line of credit with your agency’s bank. It is always better to borrow money when you don’t need it then to try and go to the bank with hat in hand when times are tough. A line of credit can be a great way to smooth the cash flow peaks and valleys of the year. This way your insurance carrier partners never have to know when you are going through a tough time in your business. Another benefit is that this can help build a good relationship with your banking partners as well which can come in handy if you need to borrow money in the future to help finance business expansion.
What to Do When You Must Pay Late
Sometimes, despite your best efforts, you might not be able to pay an insurance carrier on time for one reason or another. Perhaps a long time client just bounced a big check and it threw you for a loop. In a situation like that, your best strategy can be stated in three words: communicate, communicate, and communicate. Don’t wait until you receive the third dun letter from a carrier. Pick up the phone as soon as you know you have a problem. Talk to the person who has decision making authority in the Accounts Receivable department and briefly explain what the problem is, how you are solving it and when you expect to be able to pay. If you can make an immediate partial payment, even a small one, it is essential that you do so. As the old saying goes, it always pays to put your money where your mouth is.
Insurance carriers value their relationships with their independent insurance agency partners just as much as their agencies value them. It is a two way street. If you can establish that you are one of the “good ones” you can set yourself up for success for years to come.