Advisers have a great opportunity to offer business protection to company direct-ors but the market remains untapped. Recent research we conducted into the nation’s SMEs highlights the risks they face.
Indeed, it found a third have no insurance at all for their debts, despite the fact the average SME owes nearly £350,000 at any one time. If anything unexpected was to happen to a key person in terms of illness or death, many SMEs could be left struggling to deal with the loss or absence of a vital cog in their business as well as the need to repay substantial debt.
The challenge for advisers is going to be making business owners aware of these risks. Of the SMEs we surveyed that did not have cover, 72 per cent did not see any need to insure their business debts. Access to the company directors is key: of the businesses that do have insurance cover, 89 per cent had been advised to consider taking it out by their adviser or bank. In short, once directors are made aware of the risks posed by unprotected corporate debt they usually do something about it.
Some debts are more risky than others, such as short-term financing or debt that must be repaid annually. For instance, SMEs using credit cards has rocketed from just 3 per cent in 2011 to 23 per cent this year. Similarly, SME debts of over £50,000 in directors’ loan accounts have increased from 20 per cent to 33 per cent.
These accounts present a particular risk as awareness levels of how they actually work are not as high as they should be. Almost a third (28 per cent) of the directors we asked did not know their DLA needed to be repaid in the event of their death.
This should be of particular interest to advisers as directors making loans to the business often do so using funds derived from a personal mortgage secured against their home.
Even directors who diligently protect their mortgage borrowings with personal life cover may still be exposing their business to unforeseen credit risks in the event of their death if they use the proceeds of a mortgage to fund their business via their DLA. If the director were to die, the personal life policy could be used to repay the mortgage but the company would still owe the directors’ estate the money released from the mortgage to fund the business.
So what can advisers do to change SMEs’ attitudes when it comes to business protection? Well, in the example above, they could suggest to the business owner that the company takes out protection on the director as a key person, thus enabling the DLA to be repaid to the estate, which could in turn use the money to repay the mortgage debt.
The lack of business protection in the UK is mainly due to a lack of knowledge of the risks and a lack of awareness of the solutions. If advisers can sit around the same table as business owners and their accountants they can help them understand this. The market demand is there and advisers are in an ideal position to spot the opportunities.
Stuart Halliwell is market development manager, specialist protection, at Legal & General