Business Loan Protection
Who repays the loan if the person behind it is no longer there?
Business loan protection provides money to repay business borrowing if a director, shareholder, partner or guarantor dies or becomes critically ill.
Lenders often look to the people behind a business, not just the business itself. If one of them dies, the debt doesn't disappear. The lender may review the facility, and a personal guarantee can turn a business debt into a family one.
Free, with no obligation. You deal with Des directly.
At a glance
What it covers
Commercial loans and mortgages, overdrafts, directors' loans and personal guarantees
Who owns it
The business, or the individual guarantor, depending on the debt
What it pays
A lump sum on death or, if chosen, diagnosis of a specified critical illness
Cover can be
Level, or decreasing as the loan is repaid, over the term of the loan
Authorised and regulated by the Financial Conduct Authority. FCA No. 1034779
Business borrowing often rests on personal guarantees
Many owners sign a personal guarantee to secure business borrowing.
It's a normal part of getting finance, but it means the guarantor, and potentially their estate, can be asked to repay the debt if the business can't. If that person dies or becomes seriously ill, the lender may review the facility at the worst possible moment for the business and the family.
Borrowing helps you build the business. Loan protection makes sure the debt doesn't outlive the people who signed for it.
Without cover
- The lender may review or recall the facility
- A guarantee can be called against the guarantor's estate
- The family may have to use savings or sell assets
With cover
- Money is available to repay or reduce the debt
- The business avoids a sudden cash shock
- The guarantor's family is protected
What can happen if nothing is in place
Debt that depends on one person becomes a problem the moment that person is gone.
- Facility reviewed or recalledA lender may reassess borrowing that relied on a particular director.
- Personal guarantees calledThe guarantor's estate could be asked to pay, delaying or reducing what the family inherits.
- A cash shockRepaying debt early can drain the cash the business needs to keep trading.
- Assets at riskSecured borrowing could put business or personal property at risk.
- Harder to borrowFuture finance may be harder to arrange after a key person has gone.
- Plans stallExpansion funded by borrowing may have to be scaled back.
How business loan protection works
We match the cover to the borrowing: who owes it, how much, and for how long.
Map the borrowing
We list each loan, mortgage, overdraft and guarantee, and who is responsible for it.
Understand the liability
Owners may be jointly liable, severally liable, or jointly and severally liable. This affects who needs cover and for how much.
Match the cover to the debt
Cover can be level, or decreasing as a repayment loan reduces, with a term that matches the loan.
Choose who owns the policy
Company borrowing is usually covered by a company-owned policy. A personal guarantee is often covered by a personal policy in trust, so the money is available to clear the guarantee.
If a claim is made
The proceeds are used to repay or reduce the debt. If the policy has been assigned to a lender, the lender may be paid directly.
Who it is suitable for
It's worth considering wherever borrowing depends on particular people.
- Businesses with commercial loans or commercial mortgages
- Directors and owners who have given personal guarantees
- Companies that owe money to a director through their loan account
- Asset finance or invoice finance backed by guarantees
- Owners refinancing or taking on new borrowing
- Partnerships and LLPs with shared borrowing
When it may not be the right answer
Loan protection is designed to deal with debt. It won't replace lost profit or fund the purchase of a co-owner's shares; key person and shareholder protection deal with those. Some lenders offer their own cover, and it's worth comparing it with a separately arranged policy before you decide.
Practical examples
These examples are illustrative only. The businesses and people are fictional, not clients, and any outcome would depend on underwriting, the policy terms and a valid claim.
- Illustrative example · Family company
Premises bought with a commercial mortgage
A family company buys its premises with a commercial mortgage, and both directors give personal guarantees.
If one died: the lender could review the facility, and the guarantee could fall on that director's estate.
With cover: if a claim were paid, the money could repay or reduce the mortgage, protecting both the business and the family.
- Illustrative example · Manufacturer
Borrowing to fund new machinery
A manufacturer borrows to buy new machinery, repayable over five years.
The cover: decreasing cover over the same term, falling in line with the balance.
The result: if the managing director died during the term, the outstanding balance could be repaid.
- Illustrative example · Owner-managed company
Money owed to a director
A director has lent the company a large sum, recorded in her director's loan account.
If she died: her estate could ask for the money back, straining the company's cash.
With cover: a company-owned policy could provide the funds to repay it.
Common questions
What types of borrowing can be protected?
Most types, including commercial loans, commercial mortgages, overdrafts, asset finance, directors' loans and personal guarantees.
Should cover be level or decreasing?
Decreasing cover can match a repayment loan as the balance falls, and usually costs less. Level cover suits interest-only borrowing, overdrafts or guarantees where the amount doesn't reduce.
Who should own the policy?
It depends on the debt. For company borrowing, the company usually owns the policy. For a personal guarantee, a personal policy in trust is often used so the money can clear the guarantee. I'll explain the options and why one may suit you better than another.
Can the policy be assigned to the lender?
Sometimes. A lender may ask for the policy to be assigned to them, so they're repaid directly if there's a claim. Not every policy or lender allows this.
Is the lender's own cover enough?
It may be. But lender-arranged cover can be tied to that lender and that loan, and the terms vary. Comparing it with a separately arranged policy is sensible.
Can critical illness be included?
Yes. Many policies can include critical illness cover as well as life cover. Definitions vary between insurers.
Policies pay out only on a valid claim and have no cash value. Trusts are not regulated by the Financial Conduct Authority. Tax treatment depends on individual circumstances and may change. Whether premiums qualify as an allowable business expense depends on the circumstances and applicable HMRC rules.
Find out where your business stands
The Business Resilience Health Check takes a few minutes and shows which risks apply to your business. Or book a conversation and talk it through with me.
Or call me on 0121 663 0171