It is a fact that when starting up a business, most business owners will have to take out some form of loan. These funds are vital for small and medium-sized enterprises (SMEs) when their business is just starting up, being essential in getting a venture off the ground. As such this form of debt isn’t necessarily concerning for most companies, but it can quickly become a problem if a key employee or business owner unexpectedly passes away.
More and more businesses are relying on unsecured forms of lending because they are finding it increasingly difficult to access more traditional forms of borrowing. However, this form of lending can be particularly risky for SMEs.
In the unfortunate event that a business suffers from a critical event, such as the death of one of the business owners, any outstanding loans that this individual has taken out could be called in by the lender or the estate in the case of Director loans. Given that most of the capital held by a small business is normally used to pay for critical expenses, the remaining business owners may fall into difficulty paying back these loans.
This is where debt protection can make an enormous difference. By having protection in place, these business owners would get a lump sum from the insurer to help deal with those commitments.
Despite these benefits, most SMEs are facing a serious protection gap when it comes to addressing the risks associated with unsecured forms of lending. Recent research from Legal & General has revealed that nearly one in three SMEs have no protection and, it is thought, many more may lack the correct amount of protection to ensure the longevity and financial security of their business, should the unthinkable happen. The research also highlighted the fact that 40% of businesses would cease trading within a year if a key person was to fall critically ill or pass away unexpectedly.
Unfortunately, smaller firms are far less likely than larger ones to insure their business debts, despite the fact that these companies need this form of protection the most. Legal & General’s research has shown that only 58% of small or medium-sized companies insure their debts, and even fewer recent start-ups have this cover (43%).
These businesses need protection because they usually have less resources to call on and therefore are more likely to run into difficulty repaying their debts in the event of the death of an owner or partner. This can have a knock-on effect for the business, which could end up facing bankruptcy and putting the owners’ personal finances at risk.
Moving forwards, how can we reduce this protection gap? For starters, if you are a business owner you should make contact with a financial adviser who can talk to you about business protection. With an adviser you can discuss the loans you have taken out for your business and ensure you have the necessary protection in place should you fall into a situation where it is desperately needed.
Through speaking with this adviser, they can get a better idea of your businesses circumstances and advise what business protection are suitable for your business, giving you peace of mind that you are protected. All too often, business owners are simply not aware of the risks that can from in not taking out protection for their business.
With the busy day-to-day running of a business, protection can all too easily fall down a list of priorities. However, don’t underestimate the chances of a critical event happening to your business, it can happen to anyone. Having these open and productive discussions with an adviser will ultimately help to ensure the future longevity and stability of your business.
By Richard Kateley, head of intermediary development at Legal & General