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Why small businesses should protect their loans

According to UK Finance, small- and medium-sized enterprises (SMEs) borrowed £28 billion from lenders in 2018, the latest year for which data is available. That took total outstanding loans to SMEs to £100 billion by the end of 2018.

Obviously much has changed since 2018. 2020 has been dogged by coronavirus and associated lockdowns and recession. It’s likely that company’s have therefore increased their level of corporate debt as they borrow to stay afloat, potentially even as company income has dwindled. This leaves many SMEs in a precarious position.

Businesses have numerous avenues available to them for borrowing. They could have a company overdraft, a commercial loan/mortgage or a director’s loan, where the company director loans money to the business from their personal funds. Crucially, businesses must repay a director’s loan on the death of a director if their estate requests it.

Separately, a company may also have attracted funding from a venture capitalist, who may seek the repayment of funding if someone key to driving the business exits the company unexpectedly. Here, Drewberry look at why small businesses should protect their loans.

Business loan insurance: protecting corporate debt

Business Loan Insurance is specifically aimed at repaying company debt should a key person responsible for repaying that debt pass away.

You can also add on cover which pays out if that key person becomes critically ill with an illness such as cancer, heart attack or stroke. Given the risk of critical illness tends to be higher than passing away, and can render someone out of the business long-term or even indefinitely, it could be worth considering adding this extra protection.

You align how long the policy lasts with the length of the loan period. In the event of a claim, your insurer pays out a cash lump sum equivalent to the sum of the outstanding loan. The insurer may pay the funds either into the business for the company to repay the lender or alternatively to the lender itself directly. This depends on how you set up the policy.

Depending on the type of debt your business has, the payout will either be on a level or decreasing basis. Level cover sees the payout fixed for the life of the loan. It’s used for interest-only debts, such as commercial mortgages where you only pay the interest and don’t repay the actual mortgage balance until the end of its term.

Decreasing cover, meanwhile, falls across the life of the loan, reaching zero by the end of the policy’s term. It falls as you make debt repayments and your outstanding balance shrinks. As the payout dwindles over time, premiums are cheaper for decreasing cover than for level protection.

Do I need to cover my corporate debt?

There are no legal requirements to protect outstanding corporate debt.

However, could your company meet its debt obligations if a director or anyone else key to repaying corporate debt passed away or exited the business through critical illness? If not, the business could go under.

Moreover, if your business has attracted venture capital investment, on what terms has the investor provided those funds? It could be that the venture capital firm will consider their investment no longer viable and want the money back if a key team member responsible for driving the business passes away or becomes critically ill.

For this reason, many SME owners purchase Business Loan Insurance to ensure they can repay any outstanding debts should the worst happen.

How much does business loan insurance cost?

There are a range of factors which impact the cost of cover. The most important are:

  • The value of the loan (and therefore the payout you’ll need to cover it)
  • Your age, health and medical history
  • Whether or not you smoke
  • Your occupation (with riskier jobs costing more to insure).

To provide you with a rough idea of the cost of Business Loan Insurance, we’ve teamed up with independent protection experts Drewberry. They’ve pulled some quotes from their Business Loan Insurance Calculator based on a £200,000 repayment loan due for repayment over 10 years.

The below Business Loan Insurance quotes are for healthy non-smokers in low-risk, office-based roles. While the price of cover for you as an individual will vary, these premiums should offer a rough idea of just what Business Loan Insurance costs.

AgeCost to Cover a £200,000 10 Year Loan
Life Insurance Only
35£6.16 per month
45£10.43 per month
55£24.13 per month
Life & Critical Illness Cover
35£31.65 per month
45£66.61 per month
55£156.87 per month

Getting expert advice

Now you know more about Business Loan Insurance, what are the next steps?

Firstly, there’s a lot to consider when you set it up. Paying off corporate debt to allow your business to survive should the worst happen is so important that you’ll want to get it right. For instance, you’ll need to know how HMRC taxes it and which insurers offer the best policy for your needs.

That’s why we’ve partnered with independent protection experts Drewberry, whose advisers have more than 2,700 5-star reviews for their client service. Their team of experts is ready to offer Company Bug readers help and fee-free advice in this area. They’ll compare Business Loan Insurance quotes from across the entire UK market to find you the right insurer for your business at the best price.

More on small business insurance and small business funding.

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