Why Business Loan Protection can make sense for SMEs
Many SMEs rely on director’s loans to fund their business; however a lot of them have not even considered Business Loan Protection.
Many SMEs struggle to get finance. Banks and other commercial lenders are often unwilling to lend or provide credit to start-up firms, or may charge prohibitively high interest rates. As a result, many people starting a new business end up investing their own money in it, often by taking out a mortgage on their own home. A directors' loan effectively enables you to ring-fence this investment, so that when the business becomes profitable you can take it out again.
Research from Legal & General shows that SME business owners rely on director's loans for a variety of reasons. Of those with director's loans, 47% use them as start-up capital, 44% to fund business expansion and 32% to buy shares. Other reasons are lack of credit elsewhere and also so that profits are not taken from the business.
However, whilst most business owners have some form of commercial insurance in place, many haven't considered taking out Business Loan Protection insurance.
The reality is that director's loans have to be repaid in the event of the director's death. Almost one in three business owners (28%) are unaware of this. If you haven't taken out business loan protection, it may be difficult for the business to repay these loans. This could leave companies with a black hole in their accounts, and put a severe financial strain on the business at an already difficult time.
Owners, partners or directors can insure the size of any outstanding debt, and in the event of their death this will be repaid. Most insurers offer the option to take out critical illness cover as well, which can help repay any debts that occur, if the business owner is diagnosed with one of the specified critical illnesses outlined in the policy. When a valid claim is made this sum is paid to the business.
The cost of insurance will depend on a number of factors, the most important of which are your age and the size of the loan you are insuring. The bigger the loan and the older you are, the more expensive the premiums will be. For simple life cover, this tends to be one of the cheapest forms of business protection insurance. However, including critical illness cover on top of basic life insurance will increase the cost substantially, but this extra expense can provide you with added peace of mind. Having a policy could help ease the potential financial burden of being unable to work, making life a bit easier at a difficult time.
Your bank may offer insurance against a director's loan. However, it makes sense to get independent financial advice to ensure that you are not paying over the odds and the cover is what you need.
The latest Legal & General’s annual State of the Nation report carried out in June 2021 amongst small businesses, found that 50% of respondents were now more likely to consider insuring their business loans due to the pandemic with 47% now considering putting protection in place in the event of the loss of their key people. 97% of SMEs also said they are looking for professional advice on these issues.
So, if you are one of those and would like to find out more about Business Loan Protection and other protection options, contact Kellands Corporate today.