Does your business need to consider business protection?
Whether for funding growth or covering short-term costs, loans are a common part of business finance.
Like all loans, this financing needs to be paid back over the period of the agreement.
But when a business loan is linked to a particular employee, would your business feasibly be able to repay the costs if that employee died or suffered a critical or terminal illness?
This is where business loan protection comes in.
Business loan protection provides a financial safety net in the unfortunate event you lose a key employee and can’t repay a loan.
In this guide, we take you through the details of business loan protection and how it works.
What is business loan protection?
Business loan protection is financial cover that ensures you can repay an outstanding business loan, mortgage or overdraft if a key employee dies or is diagnosed with a terminal or critical illness before the money is repaid.
In relation to business loan protection, a key employee is someone who is directly related to a business’s profits.
While there is no definition, this employee could be a business owner, senior sales person, a company director or a member of staff with a specialist skill that would be difficult to replace.
It’s critical - if considering business loan protection - that you include any finance you’ll want to pay back with the protection to ensure you have the right level of cover.
What happens if you can’t repay a business loan?
Like any loan, the inability to repay a loan, mortgage or overdraft can be severe, and have long-term consequences.
It’s possible, that failure to repay a loan could result in the confiscation of assets to the same value of the outstanding loan.
Depending on the value of the debt, this could seriously disrupt a business’ operations, or put its future at risk.
Longer-term it could also hinder a business’ ability to take out future loans, or at least result in requiring higher interest payments.
How business loan protection works
As we’ve mentioned, business loan protection is a safety net that ensures your business has the finances available to repay outstanding debt in the event a key employee dies, or suffers a critical or terminal illness.
Business loan protection is usually taken out in one of two forms:
In this form, the payout from business loan protection will remain at the same level throughout the period of cover, unless changes are made by the policyholder.
With decreasing protection, the payout amount will decrease throughout the duration of policy.
This type of protection would be more beneficial if the value of the debt is also decreasing overtime.
For example, as you pay down a loan or mortgage amount, you’ll require less money to repay the remaining outstanding debt.
How do you take out business loan protection?
When a business loan is taken out, it will usually be taken with a particular shareholder(s) named as the one responsible for paying it back.
Business loan protection will usually be taken out on the person responsible for the repayments, with the Business being the proposer if a Ltd company or individual owners being the owners of the policy if its a partnership or sole trader.
Is business loan insurance and key person insurance the same thing?
While it is possible to potentially use key person insurance to cover business loan repayments, and the basic insurance type is similar, business loan insurance does have some differences.
For example, business loan insurance must match the outstanding value of the loan (to ensure it can cover the costs of repayments)
It should also be in place for the duration of the loan (unlike key person insurance which is in place for the duration of the key person’s employment.
What can you use business loan insurance for?
While business loans are obviously to cover loans taken out by the business in the name of a particular shareholder, there are several types of loans this type of business insurance can cover.
These can include commercial loans or mortgages on business premises, venture capital loans secured during the start-up phase of a business and during periods of growth or a directors loan.
A directors loan is one that is paid to a director or their family on behalf of the business for a sum that doesn’t count towards their salary or dividends payments.
Do you need to take out business loan protection?
There is no legislation requiring you to take out business loan protection.
However, as banks will only authorise loans when you can offer security to ensure the bank will get their money back, business loan protection is highly recommended.
Without cover, either the business or directors could become liable for a substantial loan repayment that they may not be able to cover.
Get business loan protection from Rigby Financial
If your business is taking out loans or mortgages and is reliant on a specific member, or members, of staff for the debt’s repayment, you should seriously consider business loan protection.
At Rigby Financial we’ve helped hundreds of businesses find the right level of cover and debt protection to ensure they have a fall back in the event of a worst case scenario regarding their staff.
If you want to find out more about the available business loan protection products get in touch with one of our advisers.