In “normal times” many businesses take out loans to start up a company or to expand their operation. However, during the pandemic there has been unprecedented support from The Government in the form of Coronavirus Business Interruption Loan Schemes (CIBILS) and Bounce Back Loans whilst many businesses tried to stay afloat during lockdowns. Although these loans are underwritten by the Government, in the event of a business failure resulting from the demise of a director, the debt will be repaid from business assets. It is only if these assets are exhausted that the Government backing takes effect and so business owners need to protect their COVID finance alongside other debts too.
Traditional or COVID-19 support are not the only forms of loans taken out. There are many small businesses that have a Directors’ Loan, where the directors have put in their own money as a loan, usually at the start-up of a business. You can ring-fence this investment, so that when the business becomes profitable the funds can be extracted tax efficiently. However, many business owners are unaware that these loans must be repaid on demand in the event of the director’s death, potentially putting a business under financial pressure.
Usually, if you take out a mortgage on your house you will typically have a life insurance policy to repay the debt should the unexpected happen, thus protecting your family. However, with business finance the perception can be entirely different. In their 6th study of businesses in the UK, Legal & General found that many business owners agree that the loss of a key person can have dire consequences for their business. Yet more than 50% didn’t have any cover in place, and furthermore, 52% said they would cease trading within one year if this was to affect their business!
Although awareness of the importance of protecting debt is improving, a large proportion of businesses don’t have any or sufficient cover in place to repay debt. Of those who didn’t have cover, 70% didn’t see the need or hadn’t considered it.
There’s an expectation when borrowing funds that the amount will be repaid by a given date in the future. However, what if something should occur to halt the repayments before that date, or there are no funds to call upon to make the repayments? What if a personal guarantee had been given on the loan? If so, how will this impact on your family? This could leave many companies with a black hole in their accounts, and thereby put severe financial strain on the business at an already difficult time.
Insurance policies are a simple and effective way of covering the liability should death (or serious illness) occur. They can be taken out for the same timeframe as the loan and in the event of a claim the policy proceeds can be called upon to repay the outstanding debt without creating financial hardship for the remaining family members or business partners.
The repayments of the loan will still need to be maintained in accordance with the terms of the arrangement but having an insurance policy provide the funds should the worst happen secures a critical financial cushion when cash may be difficult to source, together with the certainty your family receives with the necessary financial support to ease the pressure that losing a loved one and a breadwinner can create.
It can often be easy to overlook the importance of financial protection, especially when you are running a business, but our independent financial advisers can help you review both your business and personal needs and help prioritise what’s important to you, your business, and your family.
At Armstrong Watson we are Chartered Accountants and Chartered Independent Financial Advisers. We can discuss and advise on all aspects of your protection requirements based on your individual circumstances. As all our expertise is “under one roof” we work alongside our Accountants and Tax advisers to ensure the right support is in place for the businesses and business owners we support.