Many insurance companies that offer coverage (including workers compensation coverage) to small businesses require business owners to make a down payment with the remainder paid monthly or quarterly. Typically, the amount charged for workers compensation is estimated based on payroll from the previous year.
Unfortunately, this type of billing can make cash flow problems even worse for small businesses. That’s because as businesses grow, so does their payroll—and basing workers’ compensation payments on last year’s payroll often means business owners could be underpaying. By the time their policy period ends, and they need to “settle up” with the insurance company, they may find themselves having to pay a substantial bill. And when cash flow is already a problem, coming up with the money to cover that bill may not be easy. And if they paid too much, this puts more pressure on a small business that could have put that cash to work during the policy year.
In recent years, more insurance companies have begun offering pay-as-you-go billing to small business customers. With this billing option, small businesses can make smaller payments more often to coincide with their payroll processing, such as weekly, bi-weekly, or semi-monthly. Furthermore, premiums are calculated based on actual current payroll rather than last year’s numbers. The end result is that small business owners are able to make payments that reflect the ongoing reality of their business and avoid being faced with the potential of a large premium audit bill at the end of the policy period.
Insurance companies also benefit because they receive payments in a timely manner that are calculated to more accurately reflect the policyholder’s business circumstances. As a result, they’re also less likely to need to chase down audit bills at the end of a policy period. It’s a win-win situation for both sides!
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