As many of you reading this will know, access to funding is vital for any entrepreneur to start a new business and help turn their vision into reality. It is perhaps easy to take funding for granted and not think about the potential impact these debts could have on your business, but that can quickly hit home should a critical event, such as the death of a director, happen.
For SMEs, financial support through either a loan or an investment can be essential in getting their venture off the ground, and the number of businesses borrowing is increasing. New research conducted by Legal & General in its State of the Nation’s SMEs research found that 65% of SMEs had some form of business debt, an increase of 33% on 2011. On average, SMEs are borrowing £176,000.
Whilst this is less of a problem for businesses borrowing from secured sources, thousands of SMEs across the UK are still using unsecured forms of lending, such as credit cards and Director Loan Accounts (DLAs). Of the over 800 SMEs Legal & General interviewed, nearly a fifth (19%) had borrowed more than £50,000 on a credit, the same amount had used a personal loan to support their business and one in five (20%) had made use of a DLA.
If the loan holder were to pass away, businesses face the risk of these loans being called in by the lender at short notice or, in the case of a Director Loan Account (DLA), the individual’s estate. Worryingly, we found that over a quarter (26%) of SMEs were unaware a DLA had to be repaid on death, despite borrowing on average £81,000.
If your business has secured its funding through any source, but especially an unsecured source, it’s important to consider the impact the death of the loan holder would have on these debts, how you would pay back such a large sum and what this could mean for the future of your business.
Smaller businesses often don’t have the resources to call on to pay back any outstanding debts after a critical event such as the death of a partner or owner, and the implications can be serious. Our research found that over half (53%) of businesses would cease trading in under a year after the death or long-term illness of a key person. One way businesses can look to protect these loans is through a debt protection policy. These policies pay a lump sum in the event an owner, director or any employee who has guaranteed a loan to support the business dies, helping the firm to repay any outstanding debts that might be called in.
Despite the benefits of business protection, many SMEs are still not insuring themselves against their debts, leading them at risk from a critical event. Nearly half of the sole traders we spoke to and over a third of small companies valued under £250,000 had no loan protection cover, and it’s these businesses that could benefit from protection the most.
If you haven’t yet protected your business debts, now is the time to speak with an adviser about debt protection. By contacting a financial adviser, you can talk to them specifically about your business’s circumstances, ensure you have the appropriate level of debt protection cover and discuss any other protection policies you may not or may not have thought about.
Whether you’re a new start-up or an established SME, it’s easy to forget or put off protecting your business, saying “it won’t happen to me”, but the risk of remaining unprotected could result in a catastrophic impact on your firm. Through speaking with an adviser to better understand these risks, you can better protect the future of your business and employees for years to come.
By Richard Kateley, head of intermediary development at Legal & General