Does your business need to consider business protection?
Business loans are common and many companies will take out a loan to either start the business, expand the company faster, or to upgrade their equipment.
While the loan is taken out for and by the business, repaying the loan will usually sit with a few key people.
In the event one of these people dies, or has to leave the business due to critical illness, the business may be required to repay the outstanding loan in full.
If the company doesn’t have the resources available or reserves built up, this can obviously put them in a serious financial problem.
This is where business loan protection comes in.
In this article we discuss the main considerations for business loan protection and why it’s important.
What is business loan protection?
If a business has any outstanding loans linked to a particular director, shareholder or key person, business loan protection provides the money to ensure these loans can be repaid in the event the named person dies.
These loans could be anything from a director’s loan or mortgage payments.
With any business loan, it could be one or all shareholders who are liable for the repayment.
When you take out a business loan, it’s important to understand the liability for the repayments (as in which shareholder has what responsibility for the repayment of any loans).
Business loan protection works in the same way as a life cover policy.
For example, when you take out a mortgage, you’ll also take out a life insurance policy which states funds will be made available to pay off the outstanding mortgage debt in the event you died.
In a commercial setting, business loan insurance pays out a sum to cover the amount of any outstanding loans in the event a relevant shareholder dies.
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.
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.
Do you need to take out business loan cover?
However, some lenders may make it a condition of the loan agreement that protection is in place before they’ll agree to a loan.
This is to protect themselves in the event of a death and ensure they get the money back.
How do you take out business loan protection?
When a business loan is taken out, it will usually be taken with a particular shareholder named as the one responsible for paying it back.
Business loan protection will usually be taken out on the person responsible for the repayments, usually using a life of another person.
It’s possible to split the responsibility for repayments between shareholders, and you can also split the amount of the loan each shareholder or person is responsible for.
Protecting your business with loan protection insurance
Ensuring your business is protected financially in the event of the death of a shareholder or key person, is critical for the future of any company.
And this includes meeting obligations for any outstanding loans taken out in the name of a person in the company.
Without protection, your business could find itself facing substantial payments that could put its reserves and immediate financial future in jeopardy.
With business loan protection your business can be prepared and put its future on a firmer footing.
Want to know more?