Protect Against Collisions and More If you drive a car in the United States, liability insurance must cover it. This type of policy pays for medical and property damage resulting from a vehicular accident. You can also purchase comprehensive and collision insurance to cover other costs. These additional coverages help protect the value of your car should it be damaged. If you are calculating how much it will cost to buy a car, you need to take into consideration the cost of insurance as well. In this article, we’ll review the basics of car insurance and the best auto insurance companies in America, including costs, pros and cons. This is a brief introduction to automobile coverage. Liability Coverage When an accident occurs, liability insurance covers you, household members and authorized drivers for the costs associated with property damage and bodily injury. It covers the cost to repair or replace property damage that you caused. [youmaylike] You are also covered if you cause the bodily harm or death to someone else while you are driving the car. This includes medical expenses, loss of income and specified legal defense costs. Collision Insurance If you are involved in a collision, this type of insurance will help pay for repairing or replacing your vehicle. If the collision is your fault, the coverage may extend to other damaged vehicles involved in the accident. States do not mandate that you buy collision insurance, but your lender or car dealer will if you finance or lease the car. Policies offer a range of deductibles, which is how much you’ll have to pay for repairs before the insurance kicks in. Larger deductibles lower the policy premiums but expose you to more out-of-pocket expenses if a collision occurs. Comprehensive Insurance Comprehensive insurance covers damage to your car that occurs for reasons other than a collision, including theft, fire, vandalism, weather and natural disasters. This coverage is often required if you finance your automobile. You can add riders to this insurance to provide coverage of additional costs, including auto towing, glass repair, daily rental while your car is in the shop and emergency roadside service. As with collision insurance, you can set the deductible on your comprehensive insurance policy to cut your premium costs. Gap Insurance If your car is severely damaged in an accident or other incident, you might find that your comprehensive and collision damage won’t provide enough coverage to pay off the amount you owe on the vehicle. Many policies pay only the fair market value of a totaled car, which might be only 80% of the amount you owe. You can buy additional insurance to plug this gap and ensure you can pay off the car loan in full if the vehicle is destroyed or stolen. Normally, car leases require you to buy gap insurance. If you pay cash or pay off your loan, you can save money by avoiding or dropping gap insurance when no longer needed. Top Five Auto Insurers These five insurers all offer full coverage policies and many additional services. Amica Amica is a superstar among car insurers, winning accolades from Consumer Reports and J.D. Powers. It’s known for handling the claims process smoothly. The average annual cost for full coverage: is $1,360. Pros You can have your car repaired at any body shop, without restrictions. Offers a premium package which, for an additional cost, provides full glass coverage, rental coverage, good driving rewards and identity fraud monitoring. Superior financial stability rating from A.M. Best. Cons Missing some discounts, such as military, low-mileage and prepay discounts. Must speak on the phone to get a quote. Sparse website when it comes to customer education. State Farm State Farm is the country’s largest multi-line insurance company. It excels in customer service and regularly garners high marks from customers. The average annual cost for full coverage: is $1,337. Pros Superior financial stability rating from A.M. Best. Excellent online quote tool, getting customers a quote in as little as five minutes. Easy claim handling and top service from its more than 18,000 agents and its easy-to-use mobile app. Cons Doesn’t offer coverage for new car replacements or uninsured motorists. Missing prepayment and automatic payment discounts. The Hartford While only 11th in size, The Hartford is big when it comes to policy options. It offers rates based on your actual driving as well as full replacement of new cars when destroyed shortly after purchase. Average annual cost for full coverage: N/A. Pros Solid benefits, including superior roadside assistance and towing programs. High marks from customers for their purchase experiences. One of the few insurers with mechanical breakdown coverage for out-of-warranty repairs. Cons Mediocre service interaction according to J.D. Power surveys. Sparse online learning materials. Geico Geico is the second-largest U.S. car insurer. It is a favorite among tech-savvy geeks who appreciate the insurer’s mobile app and excellent online service. The average annual cost for full coverage: is $1,627. Pros Geico offers plenty of ways to save, such as multi-vehicle, driving history and vehicle safety equipment discounts. Special savings for active and retired military members and federal employees. Full-featured mobile app for getting quotes, buying insurance, managing your policy, submitting claims, summoning roadside assistance and making payments. Cons Human help may be in short supply, as just about everything is handled online. No gap insurance is offered. USAA No insurer matches USAA for service to military members. Unfortunately, it's only available to active service members, their families and retired veterans. Average annual cost for full coverage: $896. Pros Superior financial stability rating from A.M. Best. Top-ranked purchase experience score from J.D. Power. Cons Missing gap coverage. Doesn’t offer interior vehicle coverage or new car replacement coverage. Limited availability. The Right One for You Competition in the insurance industry helps drive down prices and prompts insurers to offer money-saving features. For example, your carrier might reward you for a safe driving record and for having a long-term relationship with the insurer. The right insurer for you is highly rated for service, offers the exact coverage you want and does so at an unbeatable price. You should always gather multiple quotes before selecting an insurer, and make sure you get credit for all applicable discounts.
Debt vs Equity Financing
An entrepreneur has a million things to worry about. Between pleasing customers, keeping staff happy, maintaining the books and being a public face for the company, an owner’s stress never ends; it just dissipates for a while as you solve problems.
One of the biggest things a business owner must worry about is growth. As the old expression goes, “if you’re not growing, you’re dying.” Expansion is no small feat either, since it usually comes with its own assortment of challenges. Production must be increased, new staff need to be hired, and any marketing spend must be done wisely.
And then there’s financing that growth. There are two main methods for financing growth, and these are debt and equity. Which one is right for your business? It’s a complicated question without a simple answer. Let’s take a closer look.
The Pros and Cons of Debt Financing
Let’s start with debt, which is usually an entrepreneur’s default financing method.
First, the advantages of using debt. The main one is as simple as it is powerful — you’re not giving up any equity if you manage to use debt to finance your business. The owner keeps all the upside while lenders get nothing more than the principal and interest owed to them.
Another advantage is any interest paid on debt is tax deductible. That’ll undoubtedly reduce your entire tax bill, especially if your company doesn’t make much profit anyway (like most start-ups).
Getting debt financing also means the lender doesn’t have much say in how you run your business. Compare that to equity financing, where a new partial owner will likely give you a lot of input. Many entrepreneurs don’t do well in such an environment.
Let’s pivot over to some of the disadvantages to using debt to grow your venture.
Debt is often very expensive, especially if your business isn’t very mature. Lenders are conservative in nature and will want to be compensated for the risks of lending to a risky operator. Expect to pay 10-20% annually in interest.
No, that’s not a typo. Business debt is expensive; especially for small companies.
One way to get the interest rate down is to borrow the money yourself, using something like your house as collateral. This adds risk to any entrepreneurial venture, but it also makes the reward that much sweeter. You’ll want to run that one by your spouse first.
You might not even be able to qualify for debt, depending on the nature of your business. Some of the best businesses are ones without many fixed assets. However, lenders hate them because they have nothing physical that can be seized if the loan isn’t paid. You could potentially get around this by personally guaranteeing a loan, but you’ll need good credit to do that.
Another disadvantage to using debt is it must be repaid, something that can really impact your cash flow. Many businesses have used debt to expand and then found themselves paralyzed by the repayment terms; any momentum is stopped dead in its tracks right when you’re getting started.
Essentially, debt financing comes down to this: it allows owners to keep all the equity in the business, which is massive. But to gain that advantage, an entrepreneur has to endure a lot of disadvantages, too.
The Pros and Cons of Equity Financing
Let’s start with the big knock against equity financing: you’ll lose part of your ownership stake if you agree to it. For many entrepreneurs — especially those who insist on going at it alone — this makes equity financing a non-starter.
But I’d encourage every business owner to at least consider it. Everyone has weaknesses, and a good partner can contribute more than just cash. A venture capital firm can even open possibilities by having mentors that can work with a business owner or create opportunities to work with other companies that are in the portfolio.
However, that doesn’t mean equity financing will be painless. Your new partner will expect to have a significant say in the business, something that could go quite well or very poorly, depending on the skill set they bring to the table. There’s no guarantee someone with cash will end up being a good operator.
Depending on the success of your business, equity could end up costing you a bundle. A 10% stake might not seem like much today, but it’ll really hurt giving up a chunk of the upside if you eventually sell for millions. It has the potential to be much more expensive than debt.
Equity financing also comes with tons of flexibility. You don’t have to worry about making interest payments, putting up collateral or making a lender happy. You just take your equity investment, put it to work, and then worry about execution.
Investors have a much better outlook than lenders as well. These folks know it often takes years for an equity investment to work out, so they’ll be much more patient. On the other hand, a lender wants their interest the minute it’s due.
Finally, equity financing can never offer one of the biggest advantages that debt financing offers; you can’t deduct any interest from your taxes.
Debt vs Equity Financing? Which Should You Choose?
There are several factors that influence your debt vs equity financing choices. Certain businesses will be more apt to choose one over the other.
Say your business is in something with a lot of fixed assets, like flipping real estate. Lenders will be more attracted to this business, which will make getting a loan much easier. Compare that to running a website or a software company, something that owns virtually zero fixed assets. In that situation, equity financing would be your best bet.
Also, keep in mind that equity financing is a little different than what you see on Shark Tank. You’ll be forced to pitch your company to numerous investors, and you’ll spend hours each time in meetings talking about mundane details. It’s also very possible that these investors will expose numerous flaws in a company’s business model, something no entrepreneur wants to hear.
Equity financing might be the right choice if you’re convinced your business doesn’t have as much potential. Giving away a percentage of something small doesn’t hurt as much as giving away a percentage of something much larger. Keep in mind, however, that many equity investors aren’t interested in a business without great potential.
Ultimately, there are pros and cons to each form of financing. In most situations, debt is ideal. It allows growth without giving up ownership. But it’s often not possible, which forces owners to pivot to equity financing. It might hurt to give up a chunk of something you think could be massive one day, but it’s still better to own part of something big rather than all of something much smaller.