A Simple Guide to Homeowner Association (HOA) Insurance Premium Financing
Although a homeowner’s association is classified as a non-profit organization, it encounters many of the same challenges faced by small businesses. Cash flow management is one of the factors that decidedly separates successful associations from ineffective associations, so it is essential that the board of directors consider strategies to improve the HOAs cash flow.
Insurance Premium Financing is not the insurance policy itself, but instead a means of financing the purchase of an insurance policy. Traditional Premium Financing is straightforward. The bank pays the insurance premium in a lump sum at the beginning of the policy term and the association enters into an agreement with the bank to repay the amount of the loan principal (insurance premium) and interest in installments.
Incorporating an Insurance Premium Financing Strategy will directly affect an association’s cash flow because it eliminates the cash requirements for a large upfront payment to the insurance provider. As an additional benefit, associations can attach multiple insurance policies to a single Insurance Premium Loan Agreement if the policy terms and dates match.
When selecting an Insurance Premium Financing partner, it is important to remember that each bank imposes its own restrictions and assesses its own penalties. To limit an HOA board member’s liability and allow the board to retain maximum control of the HOA, associations are best served by lenders that do not require personal guarantees, do not assess pre-payment penalties, and do not attach assessment liens as part of the loan terms.