Britain is a nation of small businesses, but whilst our SMEs play a vital role supporting millions of jobs and stimulating the future growth of our economy, many of them across the country are leaving their futures unprotected when it comes to guarding against critical events.
Why, though, do SMEs need to consider such protection? For a start, planning ahead is vital when growing a successful and sustainable business. Even if you are an established firm, you should always take the time to speak with a financial adviser as they can be a real asset. Together, you can look ahead at any issues that could crop up and potentially undermine the strong footing you have secured.
Whilst there are many challenges that SMEs face in their operation, the death of a key person is one such event that can have a truly catastrophic impact on a business. One in ten owners said their business would cease to trade if they or a fellow owner died, according to Legal & General’s State of the Nation report, whilst 40% of businesses would have to end their operations within a year if a key person were to die or become critically ill.
Of course, no business owner really wants to think about being in situations like these, but whilst the bricks and mortar can be rebuilt and the computers fixed, finding a replacement for an essential part of your team can be an all together more difficult challenge. By not protecting your greatest asset, the human capital of your business, you could be potentially risking the future operation of your business, with no plan in place in the event an irreplaceable employee is unable to work or dies.
And there are also a number of other factors that have potential to exacerbate the challenges of a critical event. The rise in unsecured lending is one such trend that could put businesses at greater risk, with many failing to adequately product their debts.
Access to funding is of course vital for small businesses, allowing their owners to put financial backing to their creative ideas and helping to propel their ventures forward. However, our research has shown that SMEs are finding it harder in recent years to secure more traditional high street lending which is so vital to helping their businesses grow.
More firms are now turning to unsecured methods when seeking funding. Our research revealed that the number of businesses using credit cards for loans over £50,000 had risen dramatically from 3% to 23% between 2009 and 2014, whilst those using Director Loan accounts had more than doubled. Without the necessary protection against these loans, however, businesses could be staring at the abyss in the event these loans are recalled, potentially threatening their operation. Worryingly, a third of businesses we surveyed lacked any policy or plan to cover these debts.
Many business owners are also not aware of the risks they take by avoiding life cover or any financial plan to help buy shares in the event of another owner’s death. Having shares tied up in probate can be a damaging situation for small businesses, leaving them in an unstable position without the surety of how those shares will be bought back. It is therefore essential that business owners should agree on a plan at the earliest opportunity. Owners should review their wills, articles of association and any other agreements to set out a memorandum of understanding and protect the company’s shares in the circumstances of a critical event.
Having a plan in place is critical to responding effectively in the event a key person can no longer work, but businesses should also look to contact their financial advisers about protecting themselves to give them the extra support they need in a critical event. Whether it is protecting your shares in the event of your death, covering the cost of a key member of your team becoming ill or ensuring you’re able to pay any outstanding unsecured debts, protection can give your business the shield it needs to combat any looming threats should the worst happen. Over the coming months, I’ll be talking more about how you can best protect your business for the future, so stay tuned.
By Richard Kateley, head of intermediary development at Legal & General