What is business loan protection?
Business loan protection is an extra form of protection designed to provide businesses with added security to help them maintain stability during tumultuous times. The purpose of business loan protection is to protect businesses if they lose a key member of their personnel who has financial liability for business loans and debts.
If lenders call in debts that are guaranteed against an owner, or key person, who is the loan guarantor and has been lost to the business, either through critical illness or death, it can be an incredibly stressful experience during an already difficult time. Business loan protection will help you clear the outstanding business overdraft, loan or commercial mortgage so your business can continue to function.
This is done by creating an insurance policy in the name of the loan guarantors. If they were to, unfortunately, pass away or become critically ill, the policy can then be invoked by the company. The policy will be paid out to the business for the purpose of clearing outstanding loans or debts. In cases where the business is a partnership, the policy can be written in trust for the benefit of the remaining partners.
How does business loan protection work?
Business loan protection is there for your business during some of the most difficult times a business can experience. Business loan protection will help take pressure from the financial, and emotional, stress involved in covering debts if you should lose a key member of your business.
Business loan protection generally covers business owners or directors but can cover any key personnel who act as financial guarantors for your business. There are two major things to consider when looking at what type of business loan protection you may need:
- Life assurance: this is life insurance and can only payout if the covered personnel passes away.
- Life assurance and critical illness cover: As well as covering the death of key personnel, this also covers critical illness which means the key personnel is unable to work within the business.
This type of insurance prepares you for the worst so that you will have a policy in place to cover outstanding debts.
Why does my business need business loan protection?
Many businesses take out loans, either for initial set-up costs or during expansion. It’s not uncommon for businesses to take out multiple loans, or increase existing loans. Whilst the ability to repay this is not in question when things are running smoothly, the ability to repay is often dependent on only a few key people.
Business loan protection ensures that if you lose a key member of your team, you still have the ability to continue making payments and running your business. Losing a key member of your team is always a difficult time emotionally for everyone involved, but the right protection can minimise one worry.
What do I need to know before I can take out business loan protection?
Before you organise business loan protection, you’ll need to make sure you are clear about the liability of each individual in your company. Your business debts may be liable to more than one member of your business.
If you are joint business owners, for example, each party may have joint liability on any debts incurred by the business. Once you know this, we’ll be able to set up a suitable policy that covers anyone who has liability for repaying the loan.
You’ll also need to know the term of your loans as you’ll want your business loan protection to cover the same period. If your business loan is set to be repaid over a longer period than your business loan protection, you’ll leave yourself vulnerable when your protection lapses.
What if I don’t have business loan protection?
Business loan protection is not a legal requirement but going without can leave your business incredibly vulnerable. Losing a key member of your business will always be a tumultuous time but if you don’t have the right protection in place, it can quickly spiral.
If your business finds itself unable to pay an overdraft, loan or commercial mortgage, it has serious ramifications on your business. In worst-case scenarios, it can lead to a need to let employees go or assets needing to be sold off to cover debts.
Contact PKF Francis Clark to see how we can help
We offer a number of business protection solutions, if you would like to discuss how business loan protection could help your business, a member of the PKF Francis Clark Financial Planning team will be more than happy to talk. You can contact us weekdays 9-5 on 0800 832 1785 or email us at [email protected] anytime.
We have multiple offices across the South West of England if you would prefer to visit us in person. Visit our contact page to find out more about our offices and where we’re located.