Direct Expense Versus Firm Expense

This post belongs to a series sponsored by Old Republic Surety.

If your independent company has actually just recently included surety to complete your item offerings, you might not recognize that you have 2 billing choices for each bond you offer. Both have benefits and downsides and impact your capital along with when and how your company gets commission earnings. Which to pick? Here’s a practical description for the company principal, the financing officer, and the individual or department accountable for surety billing.

“To direct expense or not to direct expense: That is the concern…”

No, those aren’t the words of Hamlet, although he may have spoken them if he were a firm supervisor.

Fortunately, selecting in between direct expense and company expense doesn’t need a long soliloquy, however it does warrant some factor to consider if you’re in charge of billing at your company. If you haven’t examined your bond program billing in a while, possibly it’s time you provide it a review. While the distinctions in between the 2 are simple — and there’s no right or incorrect method to do it — there are some essential differences you need to understand.

Direct vs. company expense

Direct expense and company expense are precisely what you may believe: Direct expense is when the surety business expenses the customer; company expense is when you bill the customer. Sounds quite basic, best?

Other than that you’ll get commission earnings in a different way, depending upon which choice you pick. With direct expense, you get your commission after the surety has actually gotten the premiums. Sureties normally make commission payments on a month-to-month or quarterly basis. (Old Republic Surety pays regular monthly). With company expense, you’re paid your commission upfront, upon your invoice of payment from the customer. You deduct the commission owed prior to sending out the premiums to the business.

Let’s state your customers owe $10,000 in premium, and you’re entitled to 30% in renewal commission. With direct expense, you’d get a commission check of $3,000 the following month or quarter. With company expense, you’d keep $3,000 from the premiums you get and send out $7,000 to the surety.

Depending upon the size of your company and the volume of bonds you produce, direct expense and company expense can have extremely various effect on your capital. With company expense, you see your commission immediately. With direct expense, you need to wait a month or maybe an entire quarter. Evaluating and handling your earnings streams and optimizing your capital are very important elements of handling a firm. You might wish to have a conversation with your financing officer or company primary about billing method.

Dividing your billing

Each bond is billed individually, so you can choose which ones are direct expense and which are company expense. If you have 100 bonds due this month, 70 may be direct expense and 30 company expense. This offers you a lot of versatility. There might be smaller sized accounts that you’ll constantly desire direct-billed. However maybe with bigger or brand-new accounts, you’d choose company expense.

Even bonds in their very first term can be direct-billed, although many firms gather the very first premium when they compose the bond and after that change to direct billing at renewal. Some bonds are constant; if they’re established as direct expense, you don’t need to do anything.

Another essential factor to consider with company expense is the timing of your payments to the surety business. For the most part, you’ll have 45 days to make a payment. This offers a particular degree of latitude, which can be practical if among your customers is late in paying. Based upon your bank account declaration, you can choose if you wish to hold back up until the due date paying a few of your bonds.

Other factors to consider

Firm expense might appear like a no-brainer because you get your commission upfront, however you’ll need to do the processing yourself. Do you have the accounting software application and assistance personnel you require? Direct expense might be a much better choice if you have a little administrative personnel and can wait to get your commission earnings.

If cross-selling other insurance coverage items is very important to you, company expense has a benefit because you maintain the relationship with the consumer. Frequently representatives will examine protection at renewal time and recommend other policies. If your company doesn’t offer business lines, employees’ settlement, health or other items, then direct expense might be a much better fit.

Once Again, there’s no right or incorrect method to establish your billing. You’ll wish to think about how it impacts your workflow, cash-management method and relationship marketing. To direct expense or not to direct expense is really a great concern, so invest a long time believing it through.

If you have any concerns about anything associated to surety or expenses, please call your closest regional Old Republic Surety branch.