Small or medium-sized enterprises (SMEs) are a key part of the UK economy. Professional Adviser confirms that in 2022, SMEs accounted for more than 16 million UK workers and around £65 billion of lending.

As the owner of an SME reliant on the skills and knowledge of key personnel, arming yourself against the unexpected is vital.

That’s why protection is one of the key foundations of holistic financial planning. It provides peace of mind now, as well as financial security should the worst happen in the future.

And yet, while a 2021 L&G report found that more than half of SMEs were more likely to consider protection post-Covid, huge gaps still exist today.

Whether you own a small business or have business owner clients who would benefit from protection, keep reading to find out how professional financial advice can help.

Protection advice can help alleviate the biggest risks for business owners

L&G found that the three biggest risks for businesses were:

  • The death of an owner (52%)
  • A major contract loss (38%)
  • An owner suffering a critical illness (35%).

All three risks can be existential threats to an SME. The report found that 94% of surveyed companies identified at least one key individual, while 60% of businesses would expect to cease trading within 12 months if that key person died.

Protection can help to mitigate the financial loss resulting from the death of a key member of staff, help you buy back a deceased partner’s shares, or pay off outstanding business debts.

Of business owners with some form of protection in place, 73% took out the cover following advice. And while only 20% felt they could conduct their own research, a massive 97% confirmed that they would look to a finance professional for help in taking out protection.

Key person protection could help to train new staff or cover a drop in revenue through lost clients

SMEs often rely on a handful of key people. One partner might bring specialist knowledge and skills, for example, or a large bank of clients. In a small business, a single key person might supply both.

It’s easy to see why 60% of surveyed business owners keenly understand the effect of losing a key person. But key person insurance can help.

Effectively a type of life insurance, key person insurance covers the life of one or more key individuals. If a colleague passes away, surviving partners can use the payout to train existing staff or to bring a new expert into the business.

The money might also smooth the transition as a business fights to retain existing customers or increase its marketing bill to find new ones. A financial boost might also help to replace lost profit during a time of change.

Some plans will include critical illness cover too, providing a payout if a key person becomes too ill to work.

Advice can help you to identify your business’s key people and the value they add to your business. In this way, you’ll be best placed to understand the type and amount of cover you need, and the level that you can afford.

Shareholder protection insurance can help to keep your business running your way

On the death of a shareholder, the deceased’s shareholdings will often pass to a spouse or civil partner. Where the deceased’s stake was large, this might cause issues for an SME’s remaining partners.

It could upset the balance of the business, for example, and see surviving partners lose some control over how their business is run.

Equally, the deceased’s family might simply want to receive the cash value of the held shares, funds that might not be easy to raise.

In either case, shareholder protection insurance could help.

Paying out a sum on the death of a shareholder, the insurance money can be used by the remaining shareholders to buy back the shares held by the deceased person’s beneficiaries.

This allows surviving partners to retain control of the company while providing reassurance that the company will be run as the original parties intended.

Business loan protection could help ensure debts don’t go unpaid

With £65 billion of lending in 2022 alone, many SMEs hold debt in some form, be it a bank loan, an overdraft, or a commercial mortgage. Some key individuals might have their own money tied up in the business too.

Business loan protection, as the name suggests, helps to cover the cost of any remaining debt if a partner dies.

Where multiple partners have their own funds invested, these amounts can be ring-fenced, with each individual in charge of keeping track of loan amounts paid in and taken out once the business is profitable. An individual’s loaned amount must be paid back in the event of their death, so setting up cover, and for the right amounts is key.

Careful planning, with the help of a professional adviser, can ensure that all scenarios are considered and that tax implications and contingencies are included in any protection decisions.

Get in touch

While SMEs understand the value of protection, business owners are more likely to have an accountant than a financial planner.

A long-term financial plan, though, can bring peace of mind, a sense of control, and confidence that a business is ready to withstand a future shock.

If you have clients who might benefit from advice on business protection, get in touch. Email or call 0116 240 7070.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.