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Your primer on insurance brokers

Insurance brokers guide you through the process of purchasing insurance by identifying risks and providing tips

by Forma on

October 29, 2019

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For small business owners and freelancers who have just started out, staying on top of your business finances and documents can be daunting. Here’s where our article comes in, so you can quickly get a grip on the basics.

What is a balance sheet?

A balance sheet provides a snapshot of the financial condition of a company, showing how much it owns (assets), owes (liabilities) and the amount that is left over for its owners (owners’ equity) at a specific point in time. 

The balance sheet is typically completed at the end of a month or a financial year. It is comprised of three main elements:

  • Assets: These are resources that you own and can be sold. Examples include cash, vehicles, inventory and equipment. 
  • Liabilities: These are your business’ legal debts or financial obligations. Examples include loans, accounts payable and salaries payable. 
  • Owners’ (or shareholders’) equity: This refers to the owner’s share of the assets of a company. It includes the share capital (the amount that a company’s owners or shareholders invest in the business) and retained earnings (funds that are retained in the company’s accounts).

The balance sheet is divided into two sections: the left side shows the assets of the company, while the right side shows the liabilities and shareholders’ equity.


Balance Sheet
Balance Sheet

Assets are listed in order of liquidity. For example, cash or inventory are listed above less liquid assets like property or equipment. 

Liabilities are listed in order of maturity; current liabilities, which will come due within a year are listed above long-term liabilities. The latter refers to liabilities that will remain outstanding for longer than one year. 

The total sum of all assets, less a business’ total liabilities is equivalent to the owners’ equity. This represents the amount that would be available for a business owner to draw out.

Why is a balance sheet important?

The balance sheet lets a business owner and investors see what the company owns and owes, and to understand its net worth. It also indicates the financial health of a business. 

For example, a balance sheet that shows a negative balance in owners’ equity indicates that liabilities exceed assets. This can be a warning sign that the company is in a bad financial situation, and should prompt business owners to dive deeper, and uncover the causes for the negative balance. 

A balance sheet can also be used to calculate important financial ratios. One example would be the working capital ratio, which is obtained by dividing the current assets by current liabilities. This ratio measures a business’ efficiency, and shows how well it is able to meet its short-term obligations. 

And for small business owners seeking external financing, the balance sheet —along with financial statements like your cash flow and P&L—are required documents when you apply for a bank loan. 

Balance sheet templates:

example of a profit and loss statement

What is a profit and loss account?

The profit and loss account (P&L) is a financial report that shows the revenue, expenses and profit or loss of your company over a specific accounting period. 

This period can be a month, a quarter or a year. A P&L is also commonly referred to by other terms, such as the income statement, statement of operations, financial results statement and earnings statement. 

A P&L is comprised of the following key elements:

  • Sales or revenue: The amount that your company earns through the sale of goods or services.
  • Cost of goods sold (COGS): The total amount of all costs involved in selling a product during a specified period of time. 
  • Gross profit: Also known as the gross margin, the gross profit refers to a business’ profit before the operating expenses, taxes and interest payments are taken into account. It is calculated by deducting the COGS from the total sales or revenue. 
  • Operating expenses: This refers to expenditures that a company incurs in performing business operations that aren’t directly related to the productions of goods or services. Some examples include salaries, utility payments, administrative expenses and rent.
  • Net profit or loss: The net profit or loss is obtained by deducting total expenses from gross profit.  

Why is the profit and loss account important?

The P&L is a key financial statement in a business plan, as it quickly shows how much money your business has made or lost. 

What’s important is to compare your P&L across different accounting periods. In doing so, you’ll be able to identify business cycles and trends—such as the peak and trough periods that occur across the year, or aspects of your business that generate the most profit or costs. 

You may also identify changes that are not immediately apparent, such as periods where your expenses are growing at a faster rate compared to your revenue. With these insights, you’ll be better-positioned to make improved business and financial decisions. 

And lastly, information from your P&L can also be used to calculate metrics that are important indicators of your company’s financial health. These include the operating ratio, gross profit margin and net profit margin.

P&L templates:

What are Insurance Brokers?

Insurance brokers are professionals who sell various types of insurance coverage to clients. Auto, home, health, life, property, and other varieties of insurance all fall under this umbrella. Some insurance brokers work independently and others work for brokerage firms; some deal with individuals, and some elect to work only with businesses.

An insurance broker's job is to help inform clients of how best to handle risk management. They help make it possible for individuals and companies to obtain and provide insurance for themselves, their families, their property, and their businesses.

Within the UK, brokers are regulated on the state level. They're often required to hold a specialized license that can only be obtained after completing education and testing requirements. The information they learn during the period prior to certification allows them to guide clients and answer their questions without trouble. Brokers seek to help clients understand their liabilities and how to manage those risks most effectively.

Advantages of Using an Insurance Broker

The work is personal and unbiased

Because brokers work for you rather than for an insurance company, you don't need to feel anxious about hidden agendas or rushed service. They aren't tied down to a single insurance company like a captive agent would be, which means that they have a much wider pool of options to present to you. Your agent can assess your personal needs and look to multiple companies for the optimal solution.

Consolidation

When you choose to use an insurance broker rather than going through a company to purchase insurance, you can leverage a unique benefit-- you can secure all of your insurance through one broker and keep paperwork and stress to a minimum. No matter what sort of insurance you need or may obtain in the future, there's something to be said for working with one broker and having all of that information in a single place.

Improved pricing

Broker pricing has been shown time and time again to be a more favourable option than direct insurance pricing. Most insurance companies offer brokers lower rates that they can pass onto their customers; this is because businesses and individuals who choose to purchase policies through brokers are inherently lower-risk than those who go into the situation alone. Insurance companies know you'll leverage the broker's evaluation skills, which means you're less of a liability.

In addition to the above benefits, brokers:

  • Have access to a variety of products from most insurance markets
  • Can represent clients during claims settlements
  • Are regulated by the Financial Conduct Authority
  • Offer risk management advice
  • Identify, manage, and control risk
  • Offer clear information, answers, and documents
  • Hold their own professional indemnity insurance, which improves consumer confidence

Eligible customers are also protected by the Government-backed Financial Services Compensation Scheme, which ensures that they can receive compensation in the event that a broker cannot pay claims against it.

How to Use an Insurance Broker

Working with an insurance broker is as simple as finding somebody with the right qualifications who's a great match for you personally. There are insurance brokers aplenty in just about every city in the UK, so you'll have your pick of a wide variety of candidates.

Begin by asking family, friends, and other trusted individuals for their recommendations. This will give you a springboard into the process of actually selecting your broker. From here, you can do deeper research on suggested individuals. Try to find brokers who:

  • Have plenty of experience procuring insurance for exactly what you need it for
  • Have extensive positive testimonies and references from previous clients
  • Are well-equipped to support you in the event of future claims
  • Demonstrate deep knowledge of the risks you may face

Once you've selected a broker and gotten to work, you'll need to be clear about your concerns and what sorts of coverage you think you may need. Pay careful attention to the information and opinions your broker gives you after this point; your thoughts matter, but your broker has been through extensive education in order to learn what's best for you.

Don't be afraid to ask questions, seek clarification, and look for second opinions. Your broker may be better-versed in the world of insurance than you are, but that doesn't mean you need to be a doormat. Look at your broker as a partner rather than a pesky authority figure, and you'll be well on your way to protecting what matters to you the most.

How to file and pay

Is it more expensive obtaining a mortgage when I’m self-employed?

Most lenders do not discriminate on this basis, so you should qualify for the same mortgage rates as an individual earning the same income in a full-time role—as long as you can prove your income. 

Luke Somerset, Chief Commercial Officer of John Charcol explains: “There’s one main reason why self-employment could mean a more expensive mortgage. And that’s if you are turned down by a mainstream lender, and must apply through a specialist lender that deals specifically with self-employed borrowers.”

Do I stand a chance with my mortgage application if I don’t have two years’ worth of books? 

While having two to three years’ finalised company accounts or personal tax return is the minimum requirement for most lenders, it doesn’t mean that you stand no chance at obtaining a mortgage if you’re recently self-employed. 

Some lenders will accept one year’s worth of books, and there may be others that are willing to consider borrowers without a finalised single year of accounts. 

David Blake, Principal Adviser at Which Mortgage Advisers elaborates: “Some lenders work on a case-by-case basis, and will consider applicants who present a low risk. This could be someone with bags of experience within their industry, who’s decided to go self-employed because it is more lucrative. If they have a substantial deposit and can show draft figures from an accountant, it’s possible this type of applicant could be acceptable to some lenders.”

How will I be assessed if I have earnings that fluctuate?

As a self-employed person, it isn’t uncommon for your income to fluctuate from month to month, or from one year to the next. Lenders will typically use an average of your income from the last three financial years. 

However, things can get complicated if you’ve experienced a fall in your income. That’s because your lender may be concerned about your earnings showing a declining trend—particularly if you’ve experienced a significant drop in your recent earnings. In this case, the lender may not take the average figure, but base affordability on your most recent income. 

getting a mortgage when self-employed in the UK

Speak to a mortgage broker

Each lender will have their own lending criteria; some are willing to take into account your retained profits, while others will accept applicants with less than one or two years of self-employment history. A mortgage broker can save you time by pointing you in the right direction, so you know right away which lenders are a good fit with your needs. 

Think twice about switching your business structure prior to your application

Moving between two types of self-employment income just before you apply for a mortgage can complicate matters, and reduce your chances of securing a loan. 

If you’re thinking about going from being a sole trader to a limited company director, it’s best to delay your application until you have one year’s worth of books. If you apply before that, you may be offered a smaller mortgage, or have to choose from a limited selection of lenders. 

Ensure that your credit history is in good shape 

Having a pristine credit history will boost your chances of securing a mortgage and getting access to favourable rates. Your lender may check both your personal and business credit history, so it’s best that you keep a close eye on your credit reports regularly. At a minimum, you should be checking your credit reports once every year. 

If your credit score isn’t yet where you want it to be, there are steps you can take to improve it before your mortgage application. These include:

  • Being timely with your bill payments
  • Keeping your credit utilisation low
  • Monitoring your credit reports regularly, and reporting any mistakes immediately
  • Avoiding unnecessary credit applications (these can trigger a credit check, which can affect your credit score) 

Keep tax deductions to a minimum

Nikki Merkerson, Community Reinvestment and Community Partnership Officer at JPMorgan Chase advises that self-employed workers should “write off fewer expenses for at least two years before applying for a mortgage”. 

Lenders look at your net business income—so individuals who deduct a lot of expenses show an income that appears much lower than it actually is. This works against you when you apply for a mortgage, as you “need to show more money to afford more house”, states Merkerson. 

Obtain an agreement in principle

Having an agreement in principle can help speed up your home-buying process. It’s an indicator that your credit is in good shape, and conveys to your seller and estate agent that you’re a serious buyer. 

Understand your finances

Make sure you understand your business finances, and are able to provide further details when asked to by your lender. 

If you’ve experienced a dip in your income or cash flow, make sure you’re able to explain these fluctuations—such as why and how it happened, and what are the measures you’ll implement should you experience cash flow issues or a fall in income in the future. 

Showing that you have a plausible reason, and that you’re well-prepared to deal with similar circumstances down the road will increase your chances of securing a mortgage. 

Keep up-to-date records and accounts

Don’t underestimate the importance of keeping good records. Dominik Lipnicki, director of brokerage Your Mortgage Decisions explains that it can make all the difference, as even applicants with stable earnings and a good credit history are rejected due to poor records. 

“It really pays to have up-to-date accounts prepared by a qualified accountant,” he adds. “If you scrape through with the bare minimum of paperwork, your options will be very limited and you’ll probably end up paying a higher rate.”

Additional points to note

1. Dividends can’t be paid out if a company is losing money

Dividends can only be paid on profits that a company has earned during the year, or from accumulated profits from previous years. On the other hand, salaries can be paid out even when a company has made a loss. 

2. Paying a dividend doesn’t reduce your company’s corporation tax bill

Companies pay Corporation Tax on its profits before dividends are distributed, so paying a dividend doesn’t affect your company’s corporation tax bill. On the other hand, salaries are considered as business expenses. These reduce your profit, and subsequently your Corporation Tax.

3. Creating different classes of shares can be an option worth exploring

Does your company have working and non-working partners? Creating different classes of shares may be an option you might want to explore, so that both types of partners don’t wind up receiving the same dividend rate. 

4. Timing is key 

In general, companies distribute dividends every quarter or half year. There aren’t any hard and fast rules when it comes to how often dividends are paid out—and this is something your need to consider carefully. That’s because: 

  • It can have an impact on the amount of tax you pay: Dividends can be a way for you to balance out your profits from one year to another, so you can avoid being put into a higher tax bracket. If your profits are £55,000 in the first year and £10,000 in the second year, you can declare a lower dividend for the first year so that you pay the basic rate for both years—rather than paying the higher rate for the first year.
  • It can have an impact on your HMRC deadlines: Income tax on dividends are due in January after the tax year (running 6th April - 5th April) in which the dividend was distributed. This means that tax on a dividend received in February 2019 will be due in January 2020. If the dividend was paid out on May 2019, the tax will be due in January 2021. 

5. Your personal pension can be affected

Receiving income as dividends (rather than a salary) can help reduce your tax load. Yet, it’s important to keep in mind that your personal pension will be affected, as getting a salary increases contributions that can be paid into your personal pension. 

We recommend checking in with your accountant about minimum salary requirements that may be imposed if you want to make contributions to a personal or executive pension plan. You may also want to discuss whether setting up a company pension scheme is an option you should consider. 

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