A recent report from MoneyAge suggests that UK small and medium-sized enterprises (SMEs) currently hold £672 billion of unprotected debt.
Although 75% of SMEs have corporate debt – at an average of £200,000 – just 20% have protection in place.
The death of a director or business partner could lead to an existential threat for these companies.
As we approach the end of Debt Awareness Week 2022 (21 to 27 March), find out why it is so important for your business-owner clients to protect themselves, their families, and their business against the unexpected.
The death of a director or business partner could make repaying company loans difficult
Designed to encourage open discussion around financial difficulties, this month’s Debt Awareness Week is largely focused on problem debt held by individuals. But it pays to be aware of the debt held within your, or your clients’ businesses too.
Business owners will likely have some form of company debt, whether an overdraft, loan, or mortgage. Most of this debt will have been an unavoidable part of setting up, growing, and successfully running a small business. But that doesn’t mean it should be left unprotected.
Your clients are likely to have a life insurance policy in place, possibly aligned to their mortgage and designed to ensure payments could continue in the event of their death. However, they might not have the same precautions in place for their business.
The death of a director or partner could be catastrophic for the business, especially where the repayment of debt is concerned, but business loan protection could make a huge difference for surviving directors, staff, and their families.
It is possible to protect against a death within a company, helping to ensure that loans can be repaid
Mortgage debt, or that from a business loan used to cover start-up costs like machinery and marketing, isn’t a problem. But it can become an issue if it isn’t protected and the worst happens.
If your clients are the guarantors, or joint guarantors, on a business loan, they will be liable to repay that debt if the business fails.
If the failure of the business is due to the death of a director or partner, that could leave just one guarantor responsible for repaying an entire business’s debt.
Where the money can’t be repaid through the business, individual assets could be at risk, including the surviving director’s home. This could leave your client and their family facing enormous financial hardship.
Protection in the form of life insurance covering the company director or directors is one way to secure this debt.
Insuring company directors and ringfencing personal business loans
If your client is setting up their own business, and they acquire a business loan, they might use business loan protection to insure against their own death. Should the worst happen, the policy will pay out to cover the business loans and ensure the liability doesn’t shift to the business or the deceased’s assets.
This gives business owners peace of mind that their families will be secure, without business and money worries at what will already be an exceedingly difficult time.
Where a business is deemed too high risk to secure a business loan from a lender, clients might have been forced to invest their own money. If the business is a partnership or has several directors, more than one individual might have invested in the company.
Recouping this money when the business becomes successful is vital, but can become complicated, especially as the loans must be immediately repaid on the death of a director.
With no cover in place, making these repayments could threaten the business. If the business fails as a result of being unable to repay the loan, the director’s surviving family could be severely out of pocket.
A directors’ loan is one way to ring-fence an individual director’s investment, allowing them to repay their initial loan as the business becomes profitable. Setting up protection against their death will allow the loan to be repaid without threatening the profitability of the business.
Critical illness cover could also be an option. Taking out life cover with some element of critical illness cover attached means that a sum will be paid if a director is diagnosed with a condition listed in the policy.
The condition might prevent the successful running of the company but the lump sum the policy provides might bridge the gap until they are back on their feet.
Get in touch
If you have business-owner clients who would benefit from business loan protection to cover themselves and their families against a potential future liability, please get in touch. Email firstname.lastname@example.org or call 0116 240 7070.
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