Business Loans and Protection Insurance
Almost all businesses, large or small, have borrowings from a bank in order to trade. For many small businesses these will take the form of an overdraft or a specific loan and some form of life insurance will have been advised with the loan. It is in the interests of the bank and the borrower to cover the loan in the unlikely event of death.
Unfortunately, often the level of protection purchased at the time is not appropriate to the risks of the business overall. Many small business are supported by additional capital from friends and family, director’s loans and hidden subsidies to the business, like office space in a private house, the loan of vehicles or equipment or the press-ganging of family members to meet a rush!
At regular intervals the business owner needs to step back from the daily pressures of business and explore the impact of death or serious illness of themselves and key staff. Some business owners would rather not think about the potential disasters out there, but if you address them and take precautions, if the worst happens, it is not as bad as you expected. Conversely, to steal a phrase I first heard from an army trainer, “If you fail to plan, you plan to fail!”
To guide you along a suitable process, here is a short checklist to consider:-
- How much borrowings does the business have from all sources? If the business fails for any reason, who does any shortfall fall upon? The answers will be different for a sole trader or partnership than for a limited company.
- Is there existing insurance cover for all of the borrowings over the next 2-3 years in the event of the death of the business owner or other key staff?
- Could the business survive if the owner/key staff died or went on long term sickness?
- Is selling the business as a going concern realistic in a forced sale situation?
- How many families does the business support directly; do they have an alternative source of income, in the event of death or serious illness of the principal players in the business?
As a business owner, you will need to draw the line somewhere; you cannot support everyone involved in the business indefinitely, so arrange to protect you and your family’s interests first, using business protection plans, like life and critical illness or income protection to your anticipated retirement age. Employ a similar process for your key staff and consider some form of group life scheme for your remaining staff.
As an aside, for life cover, ask about Relevant Life insurance, as this can be an efficient way of providing simple life cover.
For a sole trader or small limited company, think about how you can use your pension fund as a way of protecting your family in the event of your death or serious illness. Pension funds after age 55 are accessible, so income protection or critical illness plans may be too expensive for the cover otherwise necessary. In the event of your early demise, your pension fund may be passed to a beneficiary of your choosing, so ongoing income may be sufficient.
Ask your adviser for a business protection review for peace of mind in the coming year.
Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.
If you know you need formal advice, have a look at http://bankfield.net/business/risk-management/ or http://bankfield.net/protecting-you-your-family/ or ask around for a recommendation, it might even be me.